Originally published June 3, 2009 at 9:51 a.m., updated June 3, 2009 at 3:34 p.m.
Already suffering from "after innovation erosion," where biotech firms move their manufacturing and distribution arms out of California, biotech will most certainly lose what edge it has when deep budget cuts hit state colleges and universities. Predators are already circling.
MAUREEN CAVANAUGH (Host): I'm Maureen Cavanaugh. You're listening to These Days on KPBS. It isn't as if San Diego's biotech companies don't have enough to worry about during this recession. They've seen venture capital investment dry up. They've seen their own cash reserves dwindle, and, of course, there have been significant layoffs. But now, it may be specifically California's budget shortfall that takes a toll on biotech. Industry insiders are beginning to worry that the cuts being made to California's education budget will result in fewer movers and shakes in the biotech innovation economy, and there are complaints that the state either can't or won't invest the money in the form of research and tax incentives to keep California a biotech hub. All of this has not gone unnoticed in other areas of the country. The biotech industry newsletter "FierceBiotech" has taken California off its top five list of biotech friendly recruiting regions. And places like Texas, Massachusetts and even France are actively working to recruit companies and researchers away from California. Science and technology reporter David Washburn of voiceofsandiego.org recently explored this topic in a story called "Innovation Lost", and he joins me this morning. Hello, David. Thanks for coming in.
DAVID WASHBURN (Reporter, Voice of San Diego): Good to be here, Maureen.
CAVANAUGH: And we invite our listeners to join the conversation. How important do you think biotech is to San Diego? If you work in the biotech industry, do you think California is losing its innovation edge? Give us a call, 1-888-895-5727, that's 1-888-895-KPBS. Well, David, let's start with, say, five years ago. What was California's status in the world of biotech and how did San Diego fit into that?
WASHBURN: Well, Maureen, five years ago you had the Bush administration putting, you know, a funding ban on stem cell research. California voters responded by passing a three billion dollar bond issue basically to create stem cell funding in California. I mean, it was a extremely stimulative thing to do. And so you had three billion dollars coming into stem cell research and San Diego fit into that by being – you know, Scripps Institution, UCSD, Salk Institute, all – researchers from those institutions were able to tap into that funding and it brought a lot of research, obviously, specifically into stem cells to California, and specifically to San Diego.
CAVANAUGH: And can you give us a rundown of the kinds of biotech innovators who've made San Diego and Southern California their home? Stem cell research, what else is going on here?
WASHBURN: Well, really all kinds. I mean, you have – some of the bigger companies right now are Amylin Pharmaceuticals, which has developed a diabetes drug. You have, basically, all, you know, all levels of biotech research are happening in San Diego.
CAVANAUGH: And I have heard that there's a symbiotic relationship between the research institutes that you were talking about and the institutes of higher education and these start-up biotech companies, in other words the research starts in the universities.
WASHBURN: Sure. Sure. The research starts at UCSD, it starts Salk Institute, Burnham, Scripps, the Scripps Research Institute. I mean, what happens is, is that's where the basic research happens. A lot of the funding from there does come from the NIH, from the federal government, but they will, you know, research, make discoveries, and then a lot of times start companies based on those discoveries. And then, you know, a lot of times – and those companies stay here in San Diego.
CAVANAUGH: Now, David, at the beginning of the downturn, the economic downturn nationally, I remember hearing stories that the biotech industries were recession-proof or thought they were recession-proof, and then came the credit crunch. How has that credit crunch specifically affected the industry?
WASHBURN: Well, the industry has been – I mean, the industry is in a really bad state right now as far as getting funding, venture funding in particular. And so the credit crunch is affecting the companies – any company's ability to, you know, to get funding, to float bonds of any sort, but specifically what has happened is the venture capital, which used to depend on essentially IPOs – you know, a…
CAVANAUGH: Right. Right.
WASHBURN: …venture capitalist would come in and say, okay, you know, we're going to put the – we have an excellent potential a few years – you know, a few years down the road through an IPO. Well, that has completely dried up.
WASHBURN: The IPO market has dried up, so then you don't have – without that funding, then you just don't have, you know, a really heavy stream of cash flow coming into these companies.
CAVANAUGH: And I remember right in the late nineties and the early part of this decade when there was an initial public offering, I mean, it was an event and people would sort of like vie with one another to try to be the first people to invest in industries like this, new industry, biotech industry. And yet now, if someone offers an IPO, what happens?
WASHBURN: Well, I mean, there's just not a lot of people offering them because they're just…
WASHBURN: …not going to get the – you're just not going to get the investor interest in it. There is a – I mean, we are in a transition period where they are finding different ways to fund – you know, to fund innovation and it is a big question in the industry right now.
CAVANAUGH: I'm speaking with reporter David Washburn of voiceofsandiego.org and he recently wrote a report about the biotech industry in California and San Diego. It was called "Innovation Lost". We're inviting your phone calls if you work in biotech or you're concerned about funding or attracting great personnel to your company. The number is 1-888-895-5727. And, David, in that article, you're making the case that the California budget deficit, specifically, is threatening biotech in San Diego and elsewhere in the state and you list several ways that's happening. Let's start with what you talk about with the state cuts to education. How is that affecting the biotech industry?
WASHBURN: Well, and just to take a quick step back, I mean, there is not – like you said, there's not a department of biotech…
WASHBURN: …for example, that the state is cutting. And California still has, you know, a – it is still a hub and a very strong innovation – has a very strong innovation economy. And so, you know, the article is not predicting an imminent demise but it is basically saying, you know, that there are some – that what drove – you know, what created this economy that we have, this innovation economy in California, I mean, it was largely due to the state's higher education system and the strength of the state's higher education system. I think you can get partisans probably, you know, on These Days to argue till the end of the, you know, millennium on how, you know, the wisdom of the state's – how it taxes, and its regulatory structure but I think you'll get widespread agreement that the state really made some smart moves when it focused and invested heavily in higher education and created a system that is one of the best bangs for your buck in higher education in the world. I mean, you have – you can go to Berkeley, you know, UC Berkeley, you know, the best public, if not the best public research institution in the world for, you know, room and board and everything for about $25,000.00. UCSD, you know, right up there with Berkeley, the same thing. And so what happens is that, you know, with significant cuts to the state budget, you're going to have – you're going to have to raise fees, you're not going to be able to attract the same quality talent. And, again, this is something like a slow – I mean, this is not something that we're going to wake up like there's going to be a headline, you know, next week or next year that says 'California's Innovation Economy Is Over.' But if you, you know – if too many hits happen or too many cracks in the foundation of the pillars of what built this economy, then, you know, longterm you have to be concerned.
CAVANAUGH: And your argument is especially particular to California, especially important to California, because of what one person said in your article, the fact that the biotech industry grew up organically here, it wasn't – Explain what that means.
WASHBURN: Well, I mean, you have – Like we were talking about earlier, you have – you know, when a – you know, people come to the – to a university, UCSD, you know, they go through the doctoral program or they're a researcher, they're a professor, and they will make a discovery. And those discoveries happen here, they come here, they, you know, they want to stay here so when they decide to build a company or – you know, based on this innovation, it's going to be a homegrown company in California essentially. Other places like, you know, China being an example, I think Texas is a good example of really low, you know, taxes historically, tend to be kind of grabbing companies after they've developed, kind of being the 'free agent' model while we have the kind of 'grow it up through the farm system' model, if you want to use that example.
CAVANAUGH: That's interesting. So the fact that yesterday the governor announced even more budget cuts to education is something that is of concern to people who want the industry to really survive in California.
WASHBURN: Oh, yeah, I mean, that – it is just, you know, the education system in California, and specifically the higher education system, is one of the pillars of our, you know, technology innovation, however you want to call it, economy.
CAVANAUGH: And in your article "Innovation Lost," you go into more about the actual budget deficit. How much of it, of the deficit, in relationship to the California's general fund and how large it is. You say it's 35% of the general fund?
WASHBURN: That is based on – Yes, based on analysis from, I think it's the Center for Budget and Policy Priorities. I might've mangled that title, but it's a Washington, D.C. based think tank that has been an authority on budget issues. If you look at just the different state budget situations, California has – you had like 35 – you know, anywhere between $24 and $35 billion in deficit, which represents, you know, approximately in the low 30s, low to mid-30s, you know, the percentage of the entire budget.
CAVANAUGH: And is that – how does that rack up with other states? Because I know a lot of states are struggling with budget deficits right now.
WASHBURN: Right. Right. And that is not – that's something that I, you know, we're – this is not happening in a vacuum.
WASHBURN: In California – you know, across the country, you have states in really difficult situations. California, however, I mean, we are – you know, if – definitely among the worst, if not the worst, when it comes to our current fiscal situation. I mean, it's really a disaster.
CAVANAUGH: I'm speaking with reporter David Washburn of voiceofsandiego.org. We're talking about how cuts to California's education and other areas of the state budget may affect our innovation edge in biotech here in California. The number to call to join the conversation is 1-888-895-5727. And right now, Bob in Del Mar is on the line. Good morning, Bob. Welcome to These Days.
BOB (Caller, Del Mar): Good morning. Thank you. My comment and question has to do with what's happened to biotechnology in the last few years here. We have had a number of companies that have gone bankrupt from Cancervax to Neurocrine to, recently, Aurora. And my rough calculation is that's over two billion dollars, mostly in venture capital investment that has just gone for naught. And it's no wonder that right now what I see is that the venture capital field is dead. You can – I'm involved with some local companies and it is virtually impossible to interest venture capitalists in starting a new company or putting money into an existing company because they just don't have the money and have lost so much. What is the longterm impact of this going to be on our local economy in general? And I – it's obvious what the past impact is having on biotechnology; it's stifling innovation.
CAVANAUGH: Thank you, Bob. You're breaking up a little bit, so we will take that question. And so you go into that a little bit, the longterm impact of the absolute – this budget crunch, these people who are not going to be investing in – and, let's face it, biotech is risky. Some of these trials don't work out, people do lose money.
WASHBURN: Right. Right. And biotech is risky but it's also been, over the past, you know, two decades, you know, a key jobs generator in San Diego. So the caller is right, there is a lot of concern. You know, coming out of this, you know, is biotech going to emerge as strong, you know, as it was going into it, so to speak. And, you know, you had – when we lost the aerospace industry, you know, for all intents and purposes, back in the early nineties, it really was the biotech industry along with some other – wireless definitely, and software, but that kind of brought the economy back, you know, and, you know, can we expect it to kind of perform the same miracle again, I mean, if you want to call it a miracle. I don't know.
CAVANAUGH: Right, because when investment comes back, it may not come back in these – in risky ventures if Bob in Del Mar has got his figures right. He said $400 million lost in these – in biotech firms over the last several years.
WASHBURN: Right, early stage funding. People are very concerned about, you know, where are we going to get the people to, you know, invest in early stage funding. I mean, there's different models. I wrote a story a couple weeks ago about the prize funding where you create these innovation prizes and, you know, that can fund it. So there's a lot of ideas out there but there's also a lot of concern.
CAVANAUGH: And in your article, you also talk about this aspect called innovation erosion, and I'd like you to explain that a little bit. It seems to me that it means that once there's a fertile ground for biotech that the state and the various agencies don't keep an eye on it and don't make sure that that fertile ground continues to be really, really profitable for biotech industries.
WASHBURN: Yes, the concept of innovation erosion is essentially – we talked earlier about how, you know, that companies grow or that the industry grows organically in California and in San Diego. And so what happens a lot is that you have a company – you know, the discovery is made in California, the company's formed in California, the patents, you know, they get through FDA approval or whatever, and then when it comes to—and this is not just in biotech, this is in other tech industries—but when it comes to like the development and the manufacturing, then it goes somewhere else. An example of that here, is that we have become a hub for algae, for research for algae becoming a biofuel and we have, you know, the same institutions I rattled off before, UCSD, Scripps, you know, have some of the top researchers in the world, and General Atomics, a local – you know, I think the largest local defense contractor, has put millions into bio – or, into algae as a biofuel. But when they decided to – you know, when they built the test facility, you know, even though everything was kind of developed here, the innovations happened here, the test facility is in Texas because they were able to get subsidies to build that facility in Texas that they couldn't get in California.
CAVANAUGH: Now how can, possibly, California be giving subsidies to biotech, though, now when it faces these huge budget deficits? Where would it find the money? How are other states doing this when they're facing their own budget deficits?
WASHBURN: Again, I think some of it has to do with the fact that California's situation is worse. And, again, I want to step back and say that this is – you know, I'm not predicting or the people I'm talking to aren't predicting a Armageddon scenario for the innovation economy here but you have – Massachusetts, for example, has, you know, close to a six billion dollar deficit, yet at the industry's large convention, kind of the bio industry's annual kind of worldwide convention called BIO, you know, the Massachusetts governor was there, was touting the industry. They are putting one billion dollars into, you know, kind of the economic development money, into the industry in Massachusetts. Other places, Georgia is, you know, is putting money into biotech. So – and it's not like, again, that California isn't but, you know, it's a very competitive landscape out there. I mean, you have – it's obvious that this economy, you know, the national economy and the worldwide economy, it's not going to be manufacturing that pulls us out of this. It's going to be innovation. It's going to be stuff like the green economy, the clean tech economy. So there's a tremendous amount of competition economic development wise. When you talk about economic development agencies at the state level, at the local level, to, you know, create clusters, to create hubs.
CAVANAUGH: Let's take a call. Desmond is on the line in San Diego. And good morning, Desmond, welcome to These Days.
DESMOND (Caller, San Diego): Hello. I had a question. Obviously there's a need for new innovative biotech products, biofuel and healthcare products for the aging population but biotech is obviously a risky business. I know in the U.K. they've been floating around a couple of ideas about having some sort of pool of many from the government, which basically would help balance the risk in biotech. So, I wondered, is there any thoughts of the federal government, at some point, you know, providing some sort of pool of money that could be used to, you know, to help minimize risk?
CAVANAUGH: Thank you for that question, Desmond.
WASHBURN: Yes, that is a good question and it brings up a very important point which is, is that the federal government actually – as part of the stimulus package, billions, I think it's close to $10 billion more, is going to the National Institutes for Health, which fund basic research. In San Diego, because of our institution – the strong institutions that we have, is always – you know, always has – in a real good position to get some of that National Institutes of Health funding. So you are seeing the government pour money into basic science research. That is happening. Now, whether that gets you to that next stage – because the basic research gets funded and then you have the – kind of that early stage development when you're saying, okay, is this going to be a commercially viable thing, that is where the concern is. But there is – the federal government is spending substantially, through the stimulus package, on NIH funding which then will, you know, can come into San Diego.
CAVANAUGH: Now I mentioned in the opening that the "FierceBiotech", it's an industry newsletter, has taken California off its list, top five list. What is that top five list and why aren't we on it anymore?
WASHBURN: Well, it's basically a list of, you know, regions that seem to be doing – you know, working the hardest, working the smartest, on attracting specifically biotech, you know, investment, economic development and that. California has always been, you know, kind of really ahead of the curve on this and, you know, the Stem Cell Initiative being like, you know, exhibit A to that in recent years. One thing is, is that with the new administration, you have the stem cell – you know, it's no longer – I mean, there is now federal funding or Obama's said we're going to have federal funding for stem cells yet they also changed the rules, which has got people in kind of a bit of a tizzy. But – so California, the Center for Regenerative Medicine, which was built out of that bond issue, is no longer as crucial as it was. And, again they cited the state budget deficit as being, you know…
WASHBURN: …as being a hamper to, you know, to economic development in that industry.
CAVANAUGH: Well, David, we'd like to end on a sort of up note if we can. And I'm just wondering, you know, here we're on the SDSU campus and SDSU has been voted number one small research university in the nation, so that's still a good sign. And I'm wondering, you mentioned the stimulus package and some innovation prizes as perhaps being seed money for biotech companies to start these trials and to fund themselves until their products take off. Any other innovative ideas, because investment capital has dried up, to get some more capital to these companies.
WASHBURN: I think that the – I mean, you're going to find venture – I mean, venture funding is not done. I mean, it's not something for the history books, and I think it's just kind of tweaking that model and figuring out that – What they have to do is find a way not to basically take so much risk at the – to somehow spread out that front end risk and there are some models. Duane Roth, who is the CEO of CONNECT, which is a local, you know, technology organization – organization for the local technology industry, has ideas along the lines where there's just – you know, you kind of – you fund to a certain stage and then maybe you partner with – develop earlier partnerships with big pharma, things like that that are – you know, that are happening. So it's not like the idea of funding innovation is dead; it's just like the old model. We're in this transition period from the old model to some new model that we're not exactly sure what it's going to be.
CAVANAUGH: Well, I want to thank you so much for talking with us this morning.
CAVANAUGH: I've been speaking with science and technology reporter David Washburn of voiceofsandiego.org. Thanks for coming in.
WASHBURN: Thank you, Maureen. I appreciate it.
CAVANAUGH: And stay with us as These Days continues in just a few minutes.