Bio Sphere
Hollywood films and high tech have the sizzle. The defense industry still packs plenty of political clout. But when it comes to attracting venture capital in Southern California, the eyes have it. And the brain catheters. And artificial pancreases.
The Southland’s surging “bio” sector was the runaway favorite of venture capital investors this summer, continuing a string of dominance that has brought more venture dollars into bioscience over the last four years than any other industry in Southern California.
Makers of drugs, medical devices and pioneering therapies garnered nearly half the $206 million wagered on promising young Southland companies in the third quarter, according to data compiled by Coopers & Lybrand.
Since 1994, Southern California bioscience firms have received more than $730 million in venture capital, outpacing other thriving sectors such as software and communications.
Given the up-and-down nature of venture investing, industry watchers can’t say how long their winning streak will last. Still, the figures underscore the growing influence of bioscience in a region whose economy still is best known for its movies, missiles and miles of beaches.
“Venture capital investment runs in cycles. Some quarters high tech is going to get all the money. Some quarters it’s something else,” says Edward H. Danse, president and chief executive of Irvine-based Advanced Corneal Systems Inc., which garnered $10.3 million in venture funds this summer to continue work on drugs to improve vision. “But I think everyone recognizes that with an aging population, biotech is a place they can’t overlook.”
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With little fanfare, Southern California has become one of the nation’s leading centers for bioscience. That catch-all term includes companies performing research and churning out products in the fields of biotechnology, biomedicine and pharmaceuticals. Their activities run the gamut from science fiction-like genetic engineering to old-fashioned marketing and sales of drugs, therapies and medical equipment.
The region is unrivaled in the production of medical devices, with more than 2,500 manufacturers calling Southern California home, according to David Anast, publisher of the Biomedical Market Newsletter Inc. in Costa Mesa. Bioscience employment in San Diego alone now tops 21,000, with regionwide figures estimated to be at least triple that.
“The joke is that Southern California has become a great place to be sick,” said Jack Kyser, chief economist with the Economic Development Corp. of Los Angeles. “That might not capture the public’s imagination like the film industry. But [bioscience] is very important to the future of the region.”
An investment adage says that one should never put money in any business whose success depends on the weather or the government. So why would venture capitalists risk millions on experimental drugs and therapies that could take up to a decade to win federal regulatory approval--if ever?
A simple calculation of risk and reward, says Massoud Entekhabi, market managing partner for Coopers & Lybrand.
“A blockbuster software product can generate $50 million . . . and can be produced in a matter of months,” Entekhabi said. “A blockbuster drug can generate $1 billion. It may take 10 years, but the [potential] successes are huge.”
Neuroperfusion Inc., a tiny Irvine company working on a device to treat stroke victims, has just begun the long process of securing approval from the Food and Drug Administration. Clinical trials have focused only on a handful of patients so far. But that didn’t stop venture investors from pumping $3 million into the firm in the third quarter, with commitments to chip in an additional $3 million.
Stroke remains a leading cause of death, with annual costs of treatment exceeding $40 billion a year, according to William Worthen, president and CEO of Neuroperfusion.
“The VCs aren’t investing because they think I’m a nice guy,” Worthen said. “Stroke is a massive market opportunity for them.”
Worthen and others note that last year’s record pace for initial public offerings--the traditional exit strategy for venture capitalists to recoup their investment--has left many firms flush with cash and eager to pursue new deals.
But despite the lopsided statistics showing most new venture dollars in Southern California going to biotech and medical device firms, entrepreneurs say bioscience never has been an easy sell.
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Clinical trials can cost tens of millions, yet most new drugs don’t survive the multiphase process to win FDA approval. The prospect of health-care reform gave some investors the jitters. Then came the Internet craze, says Karen Klause, president and CEO of Digirad Corp. The San Diego company scored $20 million in venture capital this summer to ramp up production of a new 50-pound medical imaging device that could eventually replace bulky gamma ray cameras weighing thousands of pounds.
“Two years ago, all the venture community wanted to talk about was the Internet,” Klause said. “I had people tell me there was no way they would invest in a medical device. . . . The pendulum is swinging back now.”
Although bioscience firms collectively grabbed the lion’s share of Southland VC capital this summer, the spoils weren’t divided evenly. Of the $102.6 million invested in the sector in the third quarter, $73.1 million, or 71.2%, went to 13 companies located in San Diego. The remaining $29.5 million funded three deals in Orange County. Los Angeles County start-ups didn’t attract a dime from established venture concerns.
Figures stretching back over the last four years show the disparity is no fluke. From the first quarter of 1994 through the third quarter of 1997, Los Angeles County start-ups attracted a minuscule $22.2 million, or just 3%, of the venture capital invested in bioscience firms in Southern California, according to Coopers & Lybrand. Orange County received a respectable $182.9 million, or 25%, of those VC dollars, while San Diego firms dominated, grabbing $528.1 million, or 72%.
Those figures are seemingly at odds with the fact that, between 1991 and 1995, biomedical researchers in Los Angeles County received more National Institute of Health grants than their counterparts in any other California county, according to the Southern California Biomedical Council (SCBC). Not to mention that nearby Thousand Oaks-based Amgen Inc. is one of the largest and most successful biotech companies on the planet.
But industry experts suggest that Los Angeles County still lacks the infrastructure, critical mass of companies and that all-important image that have landed San Diego and Orange County on the radar screen of major venture capital investors.
“When you think of San Diego, you immediately think of biotech. If you think of Orange County, it’s medical devices,” said Ahmed Enany, executive director of the SCBC. “But when you think of Los Angeles, you think of nothing . . . because the area is such a hodgepodge of [bioscience] activity. This contributes to the lack of identity.”
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Industry watchers point to San Diego as a prime example of how cooperation between the public and private sector--plus a bit of serendipity--transformed a shaky defense-based economy into a thriving center for biotech.
Bruce Ahern, former publisher of the Bioscience Directory who has tracked the rise of the San Diego biotech community, traces the genesis of the industry to a 1979 start-up called Hybritech Inc.
The medical test manufacturer quickly emerged as the brightest light among a cluster of fledgling biotech companies in San Diego. Giant drug maker Eli Lilly Co. purchased the company in 1986, turning many of the founding principals into millionaires.
Hybritech stalled under Lilly, which later sold it to Fullerton-based Beckman Instruments Inc. But Ahern says San Diego ultimately benefited because several Hybritech alumni, flush with cash and turned off by the Lilly culture, sparked a mini-boom of successful spinoffs.
Observers say Amgen has failed to ignite a similar burst of entrepreneurial enthusiasm in greater Los Angeles, perhaps because there has been no shakeout to propel employees toward the exits.
Hybritech’s buyout “had a snowball effect. It was a real catalyst for growth,” Ahern said.
Underpinning all this entrepreneurial activity was a solid foundation of world-class bioscience research at the Scripps Research Institute and the Salk Institute for Biological Studies.
But the real push to turn all that knowledge into viable companies came out of UC San Diego. Through a program called UCSD Connect, organizers have succeeded in bringing together entrepreneurs, public policymakers, financiers and community leaders in an ongoing network to focus on starting and growing high-tech and bioscience firms in San Diego.
“We have created a community,” Connect Director Bill Otterson said. “More than 500 of us are now working together to make sure commercialization of this technology happens.”
Los Angeles’ sprawling geography only adds to the challenge of developing a similar infrastructure. Though not as organized as San Diego, medical device makers have spawned their own unique culture within the confines of Orange County, says biomedical publisher Anast.
“I can’t go to [the theater] without running into some clients,” he said. “It’s a very supportive environment.”
Still, organizations like the SCBC are taking steps to forge a cohesive bioscience network in Los Angeles County.
SCBC Chairman Alfred Mann is negotiating with UCLA and USC to bankroll a biomedical research institute at each university, with an eye toward turning academic research into companies that create jobs and wealth.
“We need to carry on more product-oriented development efforts up to the point of commercialization,” said Mann, founder of Sylmar-based MiniMed Inc. and Advanced Bionics Inc.
Claremont Colleges plans to build a seventh college dedicated to bioscience and engineering.
The SCBC will host its first congressional summit in January to start a dialogue with California’s delegation in Washington. Meanwhile politicians like Rep. Howard Berman (D-Panorama City) are talking about creating a “High Tech 101 Corridor” from downtown Los Angeles to Santa Barbara to give the area’s bioscience community an identity--much like Northern California’s Silicon Valley, Boston’s Route 128 and North Carolina’s Research Triangle.
“All the resources are here,” said John Slifko, Berman’s special assistant for technology policy. “All we need to do is connect the dots.”
