Biomedical Industry Loses Momentum in California, According to 2012 California Biomedical Industry Report

Innovation Slows as Productivity in the Biomedical Industry Declines

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Feb 08, 2012, 08:05 ET

SACRAMENTO, Calif., Feb. 8, 2012 /PRNewswire/ -- After two decades of steady annual job growth, employment in California's biomedical industry stalled while the state has struggled to recover from financial shortfalls and the industry adapts to a sharp pullback in funding from risk-averse investors in an uncertain regulatory environment, according to the 2012 California Biomedical Industry Report published today by the California Healthcare Institute, BayBio and PwC US.

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Job losses precipitated by the financial crisis, recent company downsizings and the lure of scientists, researchers and facilities outside of California set biomedical industry employment back to 2006 levels, the report found. At the same time, California is the source of approximately 28 percent of the nation's biomedical pipeline and remains the world's leader of new innovation in emerging scientific and technology disciplines such as personalized medicine, regenerative medicine, mobile health, and nanotechnology. The report finds optimistic signs that California's biomedical industry is poised to regain its earlier momentum, but the pace and location of future growth is uncertain.

"California's biomedical industry embodies the state's distinguishing strengths, and there have been enormous investments of time, energy and money in building it," said Gail Maderis, president and CEO of BayBio. "Yet we're at a crossroads, and we'll need to continue to work together – industry and policymakers – to address the challenges to innovation and productivity the industry now faces."

PwC's analysis of the most recently released labor figures for the California biomedical industry shows the following:

The 2,323 biomedical companies with operations in California provided 267,271 jobs, paid approximately $20.4 billion to California-based personnel and generated revenue of $115.4 billion in California in 2010.
Approximately 6,300 biomedical jobs, or 2.3 percent of California's biomedical workforce, were lost across the state between 2008, when biomedical employment peaked, and the beginning of 2011.
Employment in the academic research sector was hit hardest, suffering a net decline of 3,121 jobs between March 2008 and March 2011, as state cutbacks in funding for higher education affected the research mission of California's universities and competition increased for California's research talent.
The strongest sectors in California's biomedical industry are focused on translating basic research and discoveries into products to serve patients and their caregivers. Biopharmaceuticals, including human therapeutics and drugs, is the second largest and highest-paying employer in the state's biomedical industry. Modest growth in this sector offset losses in all other biomedical sectors except wholesale trade, which includes import and export of products in the global market.
The San Francisco Bay area continues to command the highest number of biomedical industry employees in California, but San Diego County and Orange County are the only areas where biomedical employment increased in 2010, by 14 percent and 9 percent respectively.

California's Biomedical Industry on a Precipice
According to the 2012 biomedical CEO survey, a joint project of CHI, BayBio and PwC, most biomedical companies held steady or expanded their operations in California through the financial crisis, their decision to do so primarily influenced by the state's culture of entrepreneurship and innovation. Companies that reduced operations in California over the past year did so to cut costs because of the overall cost of doing business and because they expanded operations outside of California. In fact, CEOs said they expect further reduction in activities at their firms over the next two years will hit their California facilities the hardest, compared to facilities located elsewhere.

Over the past year, California biomedical companies reported significant expansions in their out-of-state and foreign operations, according to CEOs surveyed. The survey also found that:

While more than half (57 percent) of biomedical company CEOs plan to expand research and development (R&D) activities in California over the next two years, almost as many (56 percent) say they will expand manufacturing outside the state.
Nearly 78 percent of biomedical company CEOs said that their firm had been courted by other countries and/or states within the past year. Respondent companies have expanded operations in every major continent around the world, with the greatest concentration of companies so far in Western Europe and China.
Boston, North Carolina and Minneapolis/St. Paul were cited as the top three most attractive biomedical markets for R&D innovation in the U.S. outside of California.

"The importance of California's biomedical industry as an engine to create jobs and income cannot be overstated. Now is the time for creative solutions," said David L. Gollaher, Ph.D., president and CEO of California Healthcare Institute. "California companies are adaptive and resourceful. Increasingly, they are looking beyond California and our nation's borders to countries and regions with financial incentives, access to capital, and expanding markets. Despite the tremendous assets in research, talent and capital that so far have secured California's leadership in the biomedical industry, we are at risk of losing our lead in an increasingly competitive global economy."

Access to Capital is Critical to Future Growth
Biomedical companies have found it increasingly difficult to access capital through traditional means and sources as investors turn to industries that are more predictable and yield lucrative returns more quickly. The CEO survey found:

Nearly three-quarters of respondents said that their company had delayed a research or development project in the past year. That compares to 69 percent of the responding companies reporting delayed projects in 2010. The overriding reason, at just over 40 percent, was cited as "funding not available."
Venture capital investment in California life sciences declined from peak levels in 2007, following the aftermath of the 2008 financial crisis, but venture capital (VC) investments now appear to be on a steady growth trend. Venture capital firms have invested more than $2 billion per year in California's life sciences companies for the past dozen years and in 2010 invested $2.7 billion in California life sciences companies, a slight increase over 2009, with further growth in 2011.
There has been a decisive shift toward VC investments in later stage biotechnology projects while the medical device sector saw big increases in early stage projects.
California companies have 699 products in clinical development, from the investigational new drug (IND) filing to the end of Phase III clinical trials. By that measure, California accounts for more than 28 percent of the country's biotechnology pipeline.
Biomedical companies are exploring every alternative resource to fund their ongoing operations. In 2011, respondents relied most on angel investors/self-funding and government grants, both coming in at 26 percent. Venture capital investment was accessed by 25 percent of the respondents. Only 6 percent successfully tapped the capital markets for funding, while 4 percent were supported by non-governmental organizations (NGOs) or disease foundations.

"The life cycle of biomedical startup companies has changed as challenges to raising capital have increased," said Tracy Lefteroff, national life sciences partner at PwC US. "Whereas their greatest challenge in years past was in validating the science, these companies now need to validate getting funding by lowering costs and improving returns. The strength of California's life sciences industry remains closely tied to the level of confidence that the investment community has in the industry's ability to develop innovative products while effectively managing the challenges associated with clinical and regulatory risk."

A full copy of the 2012 California Biomedical Industry Report is available at www.chi.org, www.baybio.org or www.pwc.com/us/us/Calbiomedical2012.

Methodology
CHI and BayBio worked with PwC to collect and administer data for the 2012 CHI, BayBio, PwC California Biomedical Industry Survey. The survey was conducted in November 2011 and targeted approximately 100 companies that conduct business in California in the areas of pharmaceuticals, biotechnology, medical devices, diagnostics or medical equipment.

About the California Healthcare Institute
CHI represents more than 275 leading biotechnology, medical device, diagnostics, and pharmaceutical companies, and public and private academic biomedical research organizations. CHI's mission is to advance responsible public policies that foster medical innovation and promote scientific discovery. CHI's website is www.chi.org. Follow us on Twitter @calhealthcare, Facebook, LinkedIn and YouTube.

About BayBio
BayBio is Northern California's life science association, supporting the regional bioscience community through advocacy, enterprise support, and the enhancement of research collaboration. Its members include organizations engaged in, or supportive of, research, development and commercialization of life science technologies. Online at www.baybio.org. Follow BayBio on Twitter at @baybio.

About PwC's Pharmaceutical, Medical Device and Life Sciences Industry Group
PwC's Pharmaceutical, Medical Device and Life Sciences industry group (www.pwc.com/us/pharma and www.pwc.com/us/medtech) is dedicated to delivering effective solutions to the complex strategic, operational and financial challenges facing pharmaceutical, biotechnology and medical device companies. We provide industry-focused assurance, tax and advisory services to build public trust and enhance value for our clients and their stakeholders. Follow PwC Health Industries at http://twitter.com/PwCHealth.

About the PwC Network
PwC firms help organizations and individuals create the value they're looking for. We're a network of firms in 158 countries with close to 169,000 people who are committed to delivering quality in assurance, tax and advisory services. Tell us what matters to you and find out more by visiting us at www.pwc.com.

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