San Diego’s biotech companies tighten belts, but some thrive

“Show me the money” may be the new mantra for San Diego’s biotech and life science community. While the city’s industry is in no immediate danger of disappearing any time soon into the gray recession gloom, worrisome clouds are looming on the horizon.

For the past year, biotech companies have been struggling with a broken venture capital model of wary investors and lack of capital. A decade ago, venture capitalists consistently invested in emerging technologies in the hopes of cashing out in an initial public offering, but the stock market’s free fall put a stop to that pot of gold.

Now California’s biotech industry is faced with a further tightening of the proverbial money belt because of the state’s fiscal budget hole - a point brought home when the industry newsletter Fierce Biotech recently axed California from its Top 5 list of the best regions for the industry, citing the fiscal crisis as the reason.

“It is a question now of simple survival,” said Joe Panetta, CEO of BIOCOM, the largest regional science association in the world. “Start-up companies are struggling to obtain capital, and others are struggling to have their capital extended. The next six months to a year will be a very telling time.”

The fate of biotech in San Diego will directly affect approximately 36,600 employees, according to the San Diego Chamber of Commerce. Panetta worried that continuing lay-offs could make the area lose its innovative talent base, as highly educated and entrepreneurial scientists move elsewhere to escape a high cost of living and a state fiscal mess.

In addition to directly affecting employees, the industry has an annual economic impact of $8.5 billion on the city, according to the San Diego Association of Governments.

Panetta also cited the federal public policy debate about health care reform, including revamping of Federal Drug Administration policies by the new leaders, as a factor in how local biotech will survive the coming decade.

“There is so much going on right now on the policy front that could have a severe impact,” he said. “There is a lot of uncertainty. What form will health care take? If it goes to a public/private system, will there be a free open market? There are issues about patent reform and protection that could threaten innovation, as well as how innovative the FDA will be in reviewing products.”

While companies face these severe challenges, San Diego is still a powerhouse of innovation with a highly concentrated community of research institutions and universities and a crossover of technologies, from biotech to telecommunications and information technology.

“San Diego is unique,” said Panetta. “Our biotech cluster lends itself to a valuable exchange of personnel, ideas and technologies that is not seen elsewhere. It is a tight-knit community.”

Strategies for survival include:
— Encouraging pharmaceutical companies to invest
— Funding from Obama’s stimulus plan
— Securing new venture capital funding based on a prize model
— Continued funding from the National Institutes of Health.

According to the US Census Bureau, funding from the NIH in 2004 was $860 million - second among California counties.

“There is a lot of money waiting to be invested,” said Panetta. “And those companies that get it will be those that are strongest in innovative ideas.”

Other key components for survival include a new business model, based on a strong central management team, and expert outsourcing for research and development that circumvents the need to hire internally, according to Panetta.

Focused niche marketing is helping three local biotechs vault to success. Novalar, Genoptix Medical Laboratory and PhotoThera are in different stages of development, but all three have parlayed their groundbreaking ideas and products into gold.

See more stories:

Novalar raised funds by focusing on niche dental products
Genoptix listened to the market to hone its products
PhotoThera raises $50 million for stroke clinical trials

Shannon Rose Strybel is a freelance writer based in San Diego.

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