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Setting the Stage

David Gollaher Tracey Lefteroff Gail Maderis

If there is a central theme in our 2013 report on California’s biomedical economy, it’s how remarkably stable the industry has remained through turbulent times. Even as so many sectors – from financial services to construction — shed jobs after the 2008 financial crisis, companies producing innovative drugs, medical devices and diagnostics held onto their employment gains and, in many instances, continued to hire workers. By every measure, California leads the U.S. and the world in life sciences. That our core industry has remained robust sets the stage for significant growth in the years ahead, particularly with the State of California putting its fiscal house in order. The biomedical industry won’t solve the jobs crisis by itself, but it will help broaden the economy and help capitalize on opportunities that emerge from California’s basic research institutions.

The roots of California’s global preeminence in biomedical research and development lie in a unique network of public and private research enterprises. According to the well-regarded Academic Ranking of World Research Universities (2012), one-third of the world’s top 18 institutions are Californian: Stanford (2), UC Berkeley (4), Caltech (6), UCLA (12), UCSD (15), and UCSF (18). Historically, California’s greatest strategic advantage has been the ability to attract a disproportionate share of the world’s brightest minds. No other state, no nation for that matter, matches this concentration of research talent. Combining biological sciences powerhouses like Scripps, Salk, Sanford-Burnham, Gladstone and dozens other smaller institutes, the state’s basic research engine is a vital source of creative talent and novel inventions.

Based on breakthroughs in basic science – many in California’s universities and private research institutes – we are, for the first time in history, understanding diseases at the molecular level. This opens the way for new kinds of drugs, diagnostics and devices that are far more powerful, and offer much greater precision, than anything that has come before.

Given the fundamental importance of California’s basic research enterprise to human health, to the innovation economy, and to America’s global competitiveness, it seems ironic that they confront severe threats. But several years of state budget deficits, along with congressional pressure to rein in the NIH budget, raise questions about whether these institutions are sustainable in their present form. And if they must adapt to the demands of austerity, can they do so without sharply reducing the quality and quantity of world-class research production?

Along with assembling this scientific foundation, California also pioneered a model and developed the infrastructure for capitalizing on academic research and using it to build companies. When, in October 1980, Genentech floated its initial public offering (IPO), it exemplified the formula that hundreds of biomedical entrepreneurs would pursue for a generation. In its simplest form, the model depended on a scientific discovery (in this case recombinant DNA) that could yield solid intellectual property. Financing to build a company capable of refining the science, developing a product and clearing it through the FDA regulatory process was mainly the province of venture capital. In financial terms, the goal was an IPO, which would provide liquidity for early investors and tap public equity markets for additional capital to carry the company forward.

In this model, venture capital played an essential role. The gulf between an innovative idea for a product and actually producing a physical thing that can be manufactured at sufficient scale, distributed and sold is a deep one. Government agencies like the National Institutes of Health (NIH) that fund basic discovery science have typically shied away from translational research, maintaining that this was more appropriate for the private sector. One of the severe aftershocks from the 2008 financial crisis, however, was heightened risk aversion among venture investors and the limited partners who were the main source of their funds.

What we see in today’s landscape, in fact, is that venture capital investment in early-stage biomedical companies has been declining. At the same time, firms with proven products are growing and rapidly expanding globally. Since, in the long term, growth depends on a pipeline of entrepreneurial startups to bring fresh innovations to market, there is an aggressive search for new ways to fund ventures during their first phases. So today’s biomedical entrepreneurs are opening up the lens to identify different sources of capital – from individual “angel” investors, from private equity, from corporate partnerships, from private foundations, and from government grants, and so forth. As one serial entrepreneur remarked, the problem is not a shortage of capital but rather the lack of an investment paradigm that encourages first-round investments along with the promise of successive rounds as startups grow. Based on our industry’s history, we continue to believe the future is on our side and expect solutions to these funding challenges to be as innovative as California’s science.

David Gollaher, Ph.D.
President and CEO
California Healthcare Institute
Tracy Lefteroff
Global Managing Partner
Venture Capital Practice and
National Life Sciences Partner
PwC
Gail Maderis
President and CEO
BayBio

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