‘Robust Ecosystem’ Gives Strength to San Diego’s Life Science Sector

San Diego’s life science industry has, for the most part, remained resilient amid recent rocky economic conditions.

“When we compare industries, relatively speaking, life science is way more resilient than other industries,” said Miguel Motta, vice president of strategic operations and San Diego head of Biocom California.

That resiliency is due to many factors, but in San Diego in particular, Motta credits the region’s “robust ecosystem” – a combination of academic institutions, research institutions, access to talent, investors, entrepreneurs and innovation companies.

“If we have a bad year for whatever reason and we look at the fundamentals and we don’t have academic institutions, don’t have the talent, don’t have capital willing to come here, don’t have research institutions – that day is a bad day,” he said. “But the ecosystem in San Diego is not only strong, it is growing and is the envy of many places in the world.”

Economic Impact Report

A look into Biocom California’s “Life Science Economic Impact Report 2022” – an in-depth analysis of the state’s life science economic data from 2021 – reveals why other regions are envious of San Diego.

Motta said there are several big takeaways from the report, one being that growth in the life sciences industries has been consistent over the long term and has had “substantial impact” on the state and regional economies.

“The trend of the last 20 years continues to be very positive,” he said, adding that although there may be an exception in one or two years, “the overall trend is there.”

In terms of year-over-year job growth, California in 2021 was ahead of the national average with 5.8% growth from 2020 compared to the national average of 3.9% growth in life science sectors around the country. In San Diego, year-over-year job growth from 2020 to 2021 was close to 9%. Every sector of San Diego’s life science industry saw job growth, from as low as 2.2% in medical devices to as much as 15.4% in biopharma and 18% in biotechnology.

The job growth in 2021 also pushed up salaries in San Diego’s life science industry to an average of around $150,000 per year.

“It’s quite remarkable,” Motta said, pointing out that San Diego’s average salary is considerably higher than the state average for life science workers of $95,000 per year. “I think the nature of the industry here, highly focused on biotechnology, probably explains that.”

The findings in the Biocom California report were not all positive, however. For the first time since 2013, the Biocom California index value – a calculated weighted average, consisting of various components that measure the performance of the life science industry – fell. The report attributes the decline to slightly less patents produced in the state and a slight reduction in funding from the National Science Foundation (NSF) and National Institutes of Health (NIH). NIH awards in the state totaled $5.1 billion (down from $5.5 billion in 2020) with San Diego receiving around $1 billion.

But where public funding saw decreases, funding from private venture capital for California’s life science industry reached an all-time high of $16.6 billion in 2021 – an increase of over 29% from 2020 and more than triple the amount attracted in 2018. In San Diego’s haul of venture capital for life sciences in 2021 was around $5 billion.

Structured To Survive Downturns

Because of a number of factors, such as the COVID-19 pandemic and subsequent interest in investing in biotech and biopharma, 2020 and 2021 were “unquestionably very bullish, exceptional years” for venture capital in life science, Motta said.

Last year, however, was a much different story, with data showing that venture investment in life sciences was about half of what it was in 2021. Also, IPOs for biotech startups all but disappeared in 2022 after a big year for public offerings in 2021.

“Valuations have also regressed to the mean,” Motta said. “Investors – not because of lack of capital, but because of lack of certainty – have been more selective of the deals they are making. Now, there is more due diligence by the investor community.”

Although 2022 was a drastic downturn from 2021’s bullish venture investing, San Diego’s life science companies are still more “recession resistant” than other segments of the economy for several reasons, according to Avalon BioVentures Managing Partner Jay Lichter.

“I think the biotech industry has been hard the last year and a half; it’s not the go-go days anymore for sure,” he said. “But there’s just so much money now sitting on the sidelines from companies raising years of cash in 2020 and 2021 when money was available. They have the ability to execute that in a down market.”

San Diego’s life science companies also benefit from the structural timeline of life science investing.

“The product development life cycle in life science is so long that investors are generally not looking at it quarter to quarter,” Lichter said. “Typically, from idea to launch takes 10 or 12 years and in that period of time you can have ups and downs and ups and downs.”

This is especially true in San Diego, Lichter said, because San Diego is more of an “innovator location” compared to other life science hubs like Boston or the Bay Area.

“We come up with good ideas that take a long time to mature,” he said, adding that the long cycle time allows companies to “ride out the ebbs and flows” of the economy.

Because investors understand the time horizon for life science products to go from discovery through development and regulatory approval, and invest accordingly, life science companies are “more resilient to the short-term market corrections due to things that are external to the industry,” Motta said. “By nature of the industry, the type of investors and investments are more long-term oriented, which I think helps companies a lot.”

Lichter also pointed to another type of nature that gives the life science industry added resiliency – human nature.

“When you think about products, generally people want to live forever and they understand that the body will break down at some point and they’ll need new medicines to treat it,” he said. “Life or death is one of the last things you stop funding.”

That is one of the reasons why venture funding hasn’t fully stopped and has instead reached a “base normal” level following the “overexuberance” of 2021, Lichter said. “We’re sort of in the base case, but we haven’t gotten into the growth phase of the base case.”

And for firms like Avalon Bioventures, there can be some positives in investing in life science companies during unpredictable economic climates.

“We’re still a down market, no question – zero IPOs is as down as the market gets – but there’s just so much cash on the table; people are just waiting to be certain we’re at the bottom,” he said. “For a firm like us, we get the benefit of lower valuations because we’re long; we invest in really early-stage companies that’s going to take them eight or 10 years until something great happens – and the economy will be different then.”

Investments in Institutions Fuel Ecosystem

While venture capital is waiting to invest in San Diego life science companies, grant money from foundations and government agencies is still funding another important part of the region’s life science ecosystem – research institutions.

In mid-January, Calibr, a division of  Scripps Research dedicated to the “bench to bedside” development of transformative medicines, reported it had raised around $170 million in 2022.

The funding included a 10-year, $100 million grant renewal from the Bill & Melinda Gates Foundation for global health initiatives that will help usher in the next generation of medicines to address neglected diseases that drive health inequities, such as malaria, tuberculosis and others. Other notable fundings and grants include $5 million in combined investments form the Alzheimer’s Drug Discovery Foundation and the Michael J. Fox Foundation to fund a Phase 1 clinical trial for a novel biological treatment for neurodegenerative diseases, and a $67 million NIH NIAID grant to lead a new pandemic preparedness center with a focus on coronaviruses and several other known or emerging viruses.

“It’s encouraging to see the recent boost in NIH funding, as investment in biomedical research pays tremendous dividends in improving human health. However, federal funding was trending down for a long time in real dollars, and it is important that we have other funding models in place for funding basic research and drug discovery,” said Matt Tremblay, executive advisor at Scripps Research and  Calibr. “The drug discovery model we have developed at  Calibr  aims to create a self-funding cycle of foundational research and drug development, where revenues from drug licensing are reinvested in science.”

Scripps Research was not alone in receiving large grant awards in 2022. In September of last year, the Salk Institute was awarded its largest single grant in its 62-year history – a $77 million share of a five-year, $126 million NIH grant to launch the Center for Multiomic Human Brain Cell Atlas. Also in September, UC San Diego was gifted $150 million dollars from billionaire philanthropist T. Denny Sanford to expand its research programs in stem cells and regenerative medicine.

The several decades of investments in San Diego’s scientific institutions have “cultivated a rich life science ecosystem with the elements needed for it to flourish,” Tremblay said, making the region’s life science sector “as resilient as they come.”

“On one hand, these institutions help train and shape the next generation of scientists. On another, their scientific discoveries often spark spinout and startup companies,” he said “At Scripps Research, this has resulted in more than 80 spin-offs over the years, including Abide Therapeutics, Synthorx, Receptos and Vividion. Calibr also plays a role in translating early innovation into preclinical/clinical-stage therapeutics.”

Tight Employment a Sign of Resilience

In addition to large investments into life science research in San Diego, a recent large donation to hire researchers is a sign of how resilient and successful the sector is in the region.

In late January this year, the Sanford Burnham Prebys Medical Discovery Institute received a $70 million gift from namesake benefactor Sanford, specifically to hire 20 new faculty positions in research areas including cancer, neurodegeneration and computational biology.

“Our goal is to recruit the smartest, most innovative scientists from the best laboratories in the top institutions in the world,” said David A. Brenner, M.D., president and CEO of Sanford Burnham Prebys. “In addition, this new gift will be used to invest in our current faculty and research infrastructure.”

The success of life science as an industry has made finding talented researchers harder over the years. According to a report  published by CBRE, the number of researchers working in life sciences grew 79% from 2001 to 2021. Yet despite that growth, life science occupations had the second-lowest unemployment rate of all U.S. occupations at just 0.6%.

“There is an incredible demand for researchers and scientists, and shortage of biomedical skilled labor in general. This tight labor market and competition for talent proves the success of institutes and need for world-class scientists,” Brenner said, adding that to help meet the demand, Sanford Burnham Prebys doubled the size of its entering class of its graduate school this year.

Research institutes like Sanford Burnham Prebys compete against for-profit private and public companies for talented graduates to come work for them, which is why philanthropic donations like the one from Sanford are important to nonprofit research enterprises.

“If you look at how nonprofit biomedical research institutions get support, there are not as many avenues for funding. Competitive grants do not  provide project startup funds,” Brenner said. “T. Denny Sanford’s recent gift will allow Sanford Burnham Prebys to attract the most promising scientists from around the world and support them as they develop into world-class scientists. In addition, the donation will allow Sanford Burnham Prebys to invest in  our research infrastructure and technology, imperative when recruiting the brightest minds in biomedical research.”

Life Science Real Estate in Demand

In addition to a tight labor market in San Diego, another sign of the life science sector’s resiliency is the tight commercial real estate market for lab space. According to Cushman & Wakefield’s “San Diego Life Sciences Q4 2022” report, San Diego County ended 2022 with only 5.3% of direct availability in life science commercial space. In San Diego’s traditional life science submarkets, availability was “down to record levels,” with only 4.6% availability in Torrey Pines and 2.3% available in UTC.

According to the report, life science tenants have been pushing east into the Sorrento Mesa and Sorrento Valley submarkets as well as into North County where there are “options for tenants in need of production uses.”

To meet the future needs of San Diego’s life science sector, there are currently 26 properties, totaling more than 4.7 million square feet, under construction – 16 of which are expected to be delivered by the end of this year.

“While current economic factors are impacting all industries, there isn’t a city better positioned to handle the demands of the life science sector than San Diego – a community that embraces technology, research and forward-thinking industries,” said Bob Betz, executive vice president of McCarthy Building Companies San Diego.

McCarthy is a top builder of science and technology spaces in the U.S. and in San Diego has constructed notable facilities such as the UCSD Biomedical Research Facility, the J. Craig Venter Genome Lab and the Salk Institute East Building. Currently, McCarthy is building several large life science facilities, like BioScience Properties’ HQ Point and Longfellow projects Bioterra, Center Park and Lusk.

“San Diego has an abundance of local talent who bring relevant expertise when it comes to planning, building and operating these facilities,” Betz said.  “McCarthy appreciates that both life science companies and private real estate developers are relying heavily on early partnering sessions to integrate the right expertise and the right time.  This collaboration is inclusive of funding institutions and programs, as well as design and construction professionals who are able to evaluate the programming, budget and schedule against current market conditions.”

Resilient in 2023

Although the current market conditions are unpredictable, Lichter said his experience with several previous market booms and busts makes him positive for what the year ahead might bring.

“When it was go-go, all the young folks thought this was going to last forever. I said, ‘no this isn’t going to last forever.’ And now that it’s been in the downturn for almost 18 months, they’re saying ‘this is going to last forever.” No, it’s not going to last forever – it’s cyclical,” he said.

Lichter’s positive prediction for 2023 is that the market will slowly come back for biotech, with “a couple of wins” in a “choppy first half” and the second half of the year returning to “a more reasonable pace.”

“Not the 70 or so IPOs like in 2021, but you’ll see some; and see some follow-ons, see M&A pick up a little bit. I think it is a recovery in the second half of the year,” he said. “People with money need to put that money to work.”

For biotech startups, Lichter offered some advice on how to attract more capital in the downturn.

“Managing cash burn is for sure number one and number two is hit the milestones – know what the value creation of milestones are and make sure you hit them with the money available,” he said.

Looking at the life science startup industry, Motta said he sees “a regression to the mean in terms of fundamentals.”

“Companies are going back to focus on their R&D pipeline; they’re going back and focusing on really identifying unmet medical needs; they’re going back and having stellar teams, focusing on the intellectual property associated with that – and I think that’s a good thing. I think it’s healthy,” he said.

Despite the uncertainty of the current market conditions, Motta said he has yet seen data that will show a “significant change,” in the health of San Diego’s life science sector from 2021 to 2022, with the exception of venture capital investments.

If the life science sector stays resilient, San Diego’s 71,000 life science workers and over 2,700 establishments recorded in 2021 will be able to ride out the current downturn and continue to have the nearly $50 billion economic impact it had on the region – which ultimately helps San Diego’s economy as a whole.

“The resilience of life science, because of how important the industry is to the local economy, because of the impact that it has in job creation in other areas of the value chain of life sciences, I think you have that proxy,” Motta said. “That the proxy of life science is helping other areas of the economy in San Diego to be equally more resilient.” n