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Despite Its Success, California’s Biopharma Industry Faces Many Snags to Future Growth

Is California’s life science industry in danger of losing its luster?
Biotechnology and pharmaceutical companies based in California finished 2007 with a 17-percent increase in revenue, to a combined $72.83 billion.
In addition, the industry created 7,000 new jobs during the year — a 2.7-percent rise, to 268,000, from a year ago — and the $71,300 average salary it paid its employees last year was 61 percent higher than the $44,180 average for all other occupations in the state.
Beside these figures, California continues to lead the nation in venture financing received, in grants awarded by the National Institutes of Health, in concentration of businesses, in revenues, and in commercialization of technology. 
Yet a host of challenges from within and without the state threatens to tarnish its life-sciences luster. Some are global and national issues, such as increased competition from other regions and countries; generic drugs and pharma’s resulting cost-cutting; and the prospect of reduced competitiveness if Congress allows greater government intervention in the healthcare market and approves proposed changes to US patent law.
But many other challenges are unique to the Golden State, such as its need for greater workforce training and development, the prospect of cuts to the state higher education system, and inaction on economic development proposals sought by the industry and its regional groups such as BayBio [BioRegion News, Jan. 14 and Jan. 21].
Some reversals are already in motion:54 percent of California life-science companies expect to expand their R&D workforce out of state in the next two years, according to a recent report.
That report was co-written by the 250-member California Healthcare Institute and PricewaterhouseCoopers. Released on Jan. 24, the report details California’s life-sciences industry and discusses its most important issues.
The authors used an analysis conducted by the global accounting firm, plus a survey of more than 100 industry executives, several of whom contributed their own analyses of specific issues.
The report can be read here.
BioRegion News last week spoke to CHI president and CEO David Gollaher about the report and its assessment of the industry’s strengths and challenges.

How and why did this report come about? This hasn’t been an annual report.
Typically we’ve done it every 18 to 24 months, starting in 1993. This year we decided to make it an annual report, so this is the 10th or 11th report we’ve done since 1993.
California is the envy of many other states, yet this report presents its challenges. Which are short-term and which long-term?
The biggest challenges are a reflection of the overall shifts in the economy. For example, California projects a $14.5 billion deficit for this fiscal year and the next. The California State Senate voted down a state healthcare reform plan that would have expanded coverage to most of California’s uninsured, and which had been backed by Governor [Arnold Schwarzenegger] and by the Assembly. That’s a very negative economic environment. And to some degree, the industry is beholden to the overall economic environment, both for investment, and also with respect to infrastructure. To the degree that there’s not as much investment in K-through-12 education, into the state university system, into infrastructure, that has a strong environmental impact on the industry. Talent is less likely to move to California. It’s harder to attract investment. And that’s certainly one ominous trend.
More broadly in the US, the huge increase in Medicare spending, which is growing about three times as fast as [gross domestic product], suggests that government will take steps to contain medical costs. And one of the primary targets for doing so is to attack expensive medical technology — drugs, medical devices, expensive diagnostics, and so forth. I think on both counts, the industry is in for some difficult times.
How is the budget issue that you cited going to affect what will happen to the biomedical or life sciences industry this year?
The governor has been talking about a 10-percent across the board cut, including in university education and research. That has a fairly direct effect on the industry, because the industry is very much intertwined with the California academic community. It’s likely that the state will look to make cuts in its own healthcare program: California’s version of Medicaid, called MediCal, is a big market for drugs, for devices, for physician services and so forth. And cuts in that program will also reduce the market for the products of our industry.
Can you quantify that in terms of jobs lost or activity lost as a result?
No, because we’re looking into the future. We don’t know how deep this will go. We don’t know how long the economic pressure will continue. But it’s certainly, at this point, ominous.
A couple of weeks back, the Bay Area’s life science industry group BayBio issued a 12-point legislative wish list, many points of which called for new economic-development programs and incentives. In the economic environment you described, how well is that wish list likely to fare?
I think very unlikely. In the current economic environment we have in California now, and I think in the United States, looking to government for tax incentives and any kind of investment, you’ve got to be suspicious about that happening now. I don’t think it’s going to happen this year.
Yet even one contributor to your report wrote about how the state must provide far greater financial and government incentives. To what extent is California’s issue one of inadequate competitiveness on economic development?
The private sector in California has done enormously well. There’s more venture capital here than anywhere else in the country. The talent pool is deeper here than anywhere else in the world. And so the bedrock of the industry, which really started here — [South San Francisco, Calif.-based] Genentech was really the first biotech company in the world — all of that legacy provides an enormously deep and powerful source of innovation.
But the state is currently in a condition where at best it can sort of struggle to stay even. In terms of direct economic investment, it is not competitive with some other states. Nonetheless, companies would prefer to remain here and grow here if they can.
The word is that the next wave of investment, particularly companies that are transitioning from R&D to manufacturing, will look to other locations — either abroad or other states in the United States — to grow. Some companies have already done that. The fear is that over the next three or four or five years, California would lose out on some of the commercial growth that happens in the industry.
Yet an Ernst & Young professional [BioRegion News, Oct. 1, 2007] and some other industry watchers have said that American life science companies only have a window of a few years to manufacture in the US. Why would life science companies seek to do that when companies in many other industries have gone for lower-cost sites?
A decision to locate a manufacturing facility is not done on one dimension. In other words, it’s not purely looking at cost. It’s also looking at proximity to R&D. It’s looking at the quality of the workforce that one can tap into. There are a lot of factors, cost being one of them. If cost is ridiculously higher in California than elsewhere, then investors will look outside the state. But the companies that we surveyed are expanding in California; they are also expanding outside California. That seems to be a typical pattern as we look across companies.
Half the companies surveyed in [your] report said they plan to increase their manufacturing workforce over the next two years. Given the cost and other challenges, why are companies in California willing to expand within the state when most Massachusetts life-science CEOs surveyed in that state gave a different response? [BioRegion News, Jan. 7]
I can’t say. I don’t know what the CEOs in Massachusetts are thinking. But this is a much, much larger and more robust community than Massachusetts. If you were looking on a global basis, the California economy would be the fifth or sixth largest economy on a GDP basis. So there’s a lot here. And with 37 million people, California is a country unto itself, in a sense.
Your report also notes that 54 percent of companies surveyed expect to expand their R&D workforce out of state in the next two years. Is that a result of the business climate in California, or just a reflection of the fact that companies are expanding all over the world?
I think it’s a reflection of global opportunity. A recent New York Times story discussed the growing extent to which companies are doing clinical studies and clinical trials offshore. And that has been a big trend. There are countries like Singapore that have made multi-billion-dollar investments in facilities, and basically a whole series of tax incentives and so forth, to attract companies so they could build their own indigenous workforce. And many of our companies have at least small operations in Singapore.
More companies are invested in China than ever before, and there are a number of venture capitalists who have partnered with China and are creating China funds. So it’s partly a reflection of global growth. As China and India, in particular, become more competitive and richer, they are both attractive locations for manufacturing, for some R&D and they are attractive as markets.
You mentioned Singapore as well as India and China. Is it fair to say that California’s strongest competitive challenge comes more from Asia than Europe?
It’s different. It’s very different. The industrial democracies of Europe, which are highly developed markets; indeed all of the European nations have national healthcare systems, with price controls and so forth intact. Much of the leading-edge R&D from those European companies, the ones that are based in Switzerland or Germany, or England for that matter, has moved offshore. And a lot of that is in California.
For example, [Germany-based] Bayer’s major biotech R&D [center is] all in Berkeley. [Swiss drug and diagnostic giant] Roche has a major biosciences research facility in Palo Alto. Novartis, which is another Swiss company, acquired Chiron in Emeryville, and has a huge facility there, as well as in Vacaville. Novartis also has the research institute here for their genomics research in La Jolla. You don’t see the same trend with respect to Japan let alone India or China. There aren’t major R&D facilities of Japanese or Chinese companies in California. India and China are far less evolved as R&D engines compared to what has happened in Europe.
One of the report’s contributors recommends that California foster development of more large life sciences campuses, especially in the northern part of the state, akin to North Carolina’s Research Triangle Park. To what extent are California’s facilities an issue in the growth of biomed?
I don’t think it’s an enormous issue. There’s just an enormous amount of development happening at Mission Bay near downtown San Francisco. That area has been carved out for biotech and biomedical research. UCSF is there. The J. David Gladstone Institutes is there. There’s a lot of commercial development. I don’t think facilities per se are so much the issue.
Yet another contributor to the report spoke of a technology park in Xinjiang, China, and you just spoke about Singapore. It looks like a lot of the development seems to be in campus facilities.
No question. Each one is different. Singapore is very highly developed. In fact, Singapore hired Ed Holmes, who was dean of medicine and vice chancellor for research at the University of California, San Diego, a very distinguished scientist and leader, to head up [its] Biopolis biotech development project. With his wife, who is also a physician, he is spending 20 weeks a year in Singapore and going around the world to help develop that biotech initiative. So they [Singapore] are very aggressive.
How can California’s government and educational, let alone business sectors, respond to the kinds of challenges seen from Asia and Europe?
That’s a good question. It’s one we’re constantly revisiting. The short answer is, we don’t know. The current problem the state of California has is a budget deficit that’s so deep that it challenges almost everything positive the state government can do. That $14.5 billion budget deficit is much larger than the budget of most states. How you close that, how the state balances its budget, let alone gets to the point where it makes investments – again particularly in education – it’s not a clear road ahead.
You mentioned education, which was a major topic in the report, where 32 percent of companies that responded found California’s emerging workforce inadequately prepared in math and science. What efforts are there already to try to address this issue? Is the answer to boost funding for those existing programs, or is there a whole new approach that’s needed?
I think you could argue that there’s a new approach that’s needed. We have a tremendous problem with respect to dropouts from high school. The governor, at a meeting that we had with him, specifically spoke about this, what’s needed in the schools to retain students so that they don’t drop out, because dropouts create huge problems. Many of them end up on the streets, disproportionately disposed to become criminals. It’s a really serious problem.
[In addition,] California is at the margin of the immigration debate. Sometimes, people have argued that there are sort of two Californias: one which is highly educated, sending people to universities and into high-tech jobs to become knowledge workers, and then another that is more immigrant-based, less educated, less prepared to enter knowledge-based-worker, 21st-century industries, and falling behind. The most critical challenge the state faces is how to bring everybody into the developing economy on a more equal basis, and to find the resources to invest to do that. That’s the great challenge of California right now.
Is this, at heart, a state issue, or more of a school-district or local government issue?
It’s a state issue in the sense that the same set of facts [exists] throughout the state. … It’s something that the whole state has to deal with, and hasn’t found the solution. That much is very clear.
Given the difficulty of obtaining state funding posed by this budget, which has cut spending for university research budgets, what alternative sources of funding will emerge?
The state’s budget problems, I think, will be a reflection of larger economic trends. Over time, we can move from the sub-prime [mortgage] and housing problems that are coloring the current environment to a more robust economy. There have been cycles in the past 20 years. This is very much like the cycle in 1993, in which California was in desperate financial trouble. I was on the faculty of the University of California at the time, and there was about a month or two when we were paid with IOUs because the state ran out of money.
We’re headed back into another one of those cyclical dips. What happened after that was, starting in 1994, there was a very robust period of economic development in California. In the year 2000, the state was actually showing a surplus. And that was all based on rapid economic growth. We’re definitely in a down trend. What will save us will be a new round of economic growth. But it’s very hard to see what the drivers of that will be at this point.
One potential driver mentioned in the report is workers from overseas. What role, if any, is there for California institutions to play in pressing for changes to the H1-B visa program?
That’s something that’s very important because we don’t grow enough graduate students to populate the industry. We depend to some real extent on foreign workers. The same is true in Silicon Valley, across the Cisco [Systems] and Intels of the world. We simply can’t support the industry’s growth on the basis of our own population. We’ve been strong advocates for an appropriate visa policy for the foreign workers.
Will the report be used to develop a legislative agenda or wish list for CHI to pursue in Sacramento?
Sure. The last couple of pages include a policy agenda because there are issues, particularly at the federal level: intellectual property policy, patent protection, follow-on biologics, the posture that the Centers for Medicare and Medicaid Services take toward new technologies, including the adoption of evidence-based medicine, and comparative effectiveness research. All these things are factors in the environment for innovation that do affect investment. Those are explicitly political. In other words, Congress regulates or legislates every one of those areas.
What is CHI going to do as it looks to carry out the recommendations in the report?
As soon as we put this report to bed, we will begin to compile the next one. We see this report now as an annual report, rather than something less frequent.
We’re producing another report on the impact of National Institutes of Health investment in basic research, and what that means to the California economy. That will come out in the next couple of months.
Speaking of the NIH, over the past five years its funding has plateaued, even as control of both Houses of Congress shifted last year to Democrats. They went along in the end with President Bush’s tighter-budget parameters for NIH. What potential for change do you see this year?
Again, it’s a reflection of the huge federal budget deficit. The Democrats, when they came back into power, basically adopted pay-for rules in which any increase in programmatic spending had to be offset by spending reductions someplace else. That has really constrained their ability to increase spending in places like NIH and [the National Science Foundation].

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