SAN DIEGO COUNTY – The data is in, and the conclusion is San Diego’s life sciences sector is faring better than many other industries in the current economic headwind environment, leading to the hypothesis of more positive economic growth in the year ahead.
Steady Job Growth
According to the latest “Life Science Economic Impact Report” from Biocom California, examining the economic impact of life sciences in 2022, job growth in the sector was down compared to 2021, but still fared better than many other industries.
President & CEO Biocom California
“Historically, the life science industry in San Diego has regularly seen a positive trajectory in job growth. In fact, life sciences growth outpaced others in 2022,” said Biocom California President and CEO Joe Panetta.
According to Biocom’s 2023 Economic Impact report, life science organizations in the state expanded employment by 6% in 2022, while all other industries in the state expanded by only 4.2%. In San Diego, the life science industry saw 8% job growth in 2022, slightly down from 2021’s 9.4%.
“Like many other regions, 2023 saw some San Diego companies undertaking appropriate recalibration,” Panetta said. “This is largely attributable to overall economic headwinds and companies returning to their core business models post-pandemic.”
Other reasons Panetta cited for the downturn are “economic and financial,” mostly caused by the Federal Reserve maintaining higher interest rates which forced companies to reduce spending on equipment and facilities.
Despite those headwinds, the life sciences in 2022 supported 178,426 total jobs in San Diego with an average annual salary of $144,000 and a total labor income for the region of $18.3 billion.
VC Activity Down in 2022-23
Where the headwinds hit the life science sector the most is funding from venture capitalists, “who are the lifeblood of capital for the industry” and have been holding on to their capital, Panetta said.
“As companies conserve their cash, it affects the demand for equipment and research services,” he added.
According to Pitch Book, San Diego’s life science industry attracted $2.52 billion in venture funding in 2022 – less than half of the $5.11 billion in 2021. Despite the drop in venture funding, the life science sector in 2022 still produced a total economic output on $57.4 billion in San Diego, according to the Biocom report.
The industry also brought $1.2 billion in National Institutes of Health awards and $117 million in National Science Foundation awards.
Panetta said the drop in venture funding is “not surprising given overall market conditions during the time period.”
Last year, the downward trend continued but at a much less severe drop with $2.06 billion in VC funding reported. However, recent activity shows more positive indications.
According to JLL’s most recent “Life Sciences Industry Insight” report, San Diego life science companies raised $700 million in venture capital and seed funding during Q4 last year – down from from Q3’s $1 billion but more than the $615 million in Q2, describing the investment in the three straight quarters “significant.”
M&A Uptick
The report also pointed out some “notable acquisitions” last year – Bristol Myers Squibb’s purchases of MiratiTherapeutics for $5.8 billion and RayzeBio for $4.1 billion.
Executive Managing Director
JLL Life Science Group
JLL Life Science Group Executive Managing Director Greg Bisconti attribute the recent uptick in M&A activity to a “shift in momentum” from sellers to buyers who are “looking to get deals.”
“We were in this period where the investment activity pulled back a lot while people try to reestablish what pricing should be,” he said, adding that during most of last year, “everyone was trying to figure out if the market was bottomed out or not” The market needed correction, he explained, because of the COVID-era investment boon for life science companies that sent valuations sky-high.
“I think going into 2024 it’s widely accepted that most of these valuations have hit the bottom,” Bisconti said, adding that although the market correction is slowing, “there are still a lot of deals that are undervalued. Now the race is on and we’re going to see more M&A activity.”
That activity will eventually cycle into more VC funding, according to Bisconti, because as companies exit through acquisition and return money to investors, those dollars will again be deployed to fund more startups or be added to later rounds for existing companies with promising science.
“We’re now at the early stages of that component,” he said, but cautioned that “it’s not all rainbows – there’s still going to be some pain for some companies” and that the year ahead will likely see some biotechs shut down, downsized or its assets “parted out.”
Biconti added that despite the pain for some of these companies that “won’t make it,” the market correction is ultimately good for the industry.
“I like to see some balance. Not what we saw in 2021, but something more like returning to 2018, 2019 – that’s a pretty healthy environment,” he said. “The money’s there but it’s not making dumb investments and it’s not investing so much that it’s creating senseless momentum pushing valuations beyond what they inherently should be. I feel we’re at that point right now. Most of 2024 we’re going to be building up to a healthy environment where there’s balanced valuations in investing.”
Positive Outlook
Panetta, too, is optimistic that M&A activity will pick up in 2024.
“I attended the JP Morgan Healthcare Conference earlier this month and heard this mentioned frequently in presentations by CEOs of major pharmaceutical companies,” he said. “While 2024 has been off to a cautious start, there’s optimism that middle-to-late 2024 will bring lower interest rates and greater availability of capital, leading to both increased hiring and funding opportunities.
Panetta also pointed to the most recent Ernst and Young “Firepower Report” that highlights three key reasons to expect the rising trend in M&A spending to continue and accelerate in 2024 and beyond: the biopharma industry still holds near-record levels of capital reserves ready to deploy; the industry faces major revenue challenges in the next five years and needs to secure inorganic growth; and economic conditions mean there is a buyer’s market favoring acquiring companies.
“Closer to home, innovation has continued to flourish in San Diego. We will always produce early-stage companies that are attractive acquisition targets. Large pharma companies look here to add products to their portfolios,” he said. “We expect this to be a hot topic at our upcoming Global Partnering and Investment Conference in late February.”
Panetta attributes San Diego’s industry leadership in incubating and growing new companies to the strategic collaborations with and emerging technologies coming out of the region’s “world class” academic and research institutions.
“Our life science companies foster an environment of innovation that propels the industry forward. There is also a continuous stream of high caliber talent graduating from the region’s universities and community colleges,” he said.
Bisconti described San Diego as “the best place in the country to grow a biotech.”
“We have the most highly concentrated three-mile parameter of innovation in the U.S. We have the best weather, and we have a very sticky, collaborative environment.”
Panetta pointed out that the collaborative environment includes close relationships with key elected officials and government leaders who see the economic value and impact of the industry across San Diego County.
“The density of our life science cluster in San Diego creates a truly unique environment in which companies of all sizes can continue to grow and find solutions to unmet medical needs.” he said.
Biocom also finds solutions to unmet needs in life science employment through its Biocom California Institute (BCI) which works with local colleges and universities to ensure that curriculum matches the needs of employers in the area. Through BCI, Biocom tracks workforce trends, which gives Panetta “reason to be optimistic.”
“BCI is an organization dedicated to retaining talent in the San Diego region, especially in the wake of layoffs. In anticipation of a return to previous hiring levels, BCI has career exploration fellowships for veterans and first-generation college graduates here in San Diego,” he said, adding that the program receives funding from both the city and county and just recently launched a new job portal featuring jobs in the life science sector.
