(Xconomy contributor Juliet Preston helped pull this story together)
One more sign that the U.S. life sciences industry is in upheaval became evident last month, when the Chicago real estate group Jones Lang LaSalle issued its 2012 report on life sciences clusters. The study revealed that biomedical clusters in several smaller U.S. cities are gaining influence at the expense of some of the major capitals for Big Pharma.
San Diego scored the biggest upset—placing second in the latest nationwide ranking of the most-active life sciences hubs (behind No. 1 Boston). In its jump from No. 7 in the 2011 rankings, San Diego surpassed both Los Angeles and San Francisco, displacing the New Jersey-New York City region—which fell to No. 7 in the 2012 rankings.
The Chicago real estate firm says its rankings are based on a weighted score derived from four criteria: the percentage of employees in the region who are working in life sciences, hospital, and medical fields; the percentage of life sciences establishments; federal NIH funding; and venture capital funding.
The biggest reason cited for the reshuffling of U.S. life sciences clusters, however, is the so-called “patent cliff.” Anticipating a big downturn in revenue (as much as $30 billion, by some estimates) as brand-name drug patents expire in 2013, Big Pharma companies consolidated their operations last year. As a result, their “right-sizing” is boosting activity in smaller markets like Raleigh-Durham, NC, Philadelphia, and San Diego, where there are premium academic resources, a well-educated workforce, and comparatively lower overhead costs.
In short, San Diego’s life sciences industry appears to be ideally positioned for the future. But what will that future look like? In a bid to get an idea, Xconomy invited some of the young leaders of the next generation of local life sciences companies to discuss a question: “What are the core areas of excellence that you see emerging in San Diego’s life sciences sector over the next decade or two?”
I dubbed our roundtable discussion the “San Diego Biotech Leaders of Tomorrow,” and we met Jan. 30 at The Green Acre Café, the garden-to-table restaurant in the heart of San Diego’s biotech cluster on Torrey Pines Mesa. The group quickly identified a number of specific clusters at the forefront of biomedical innovation that already are flourishing in San Diego—including genomics, biomedical diagnostics (especially genetic diagnostics), industrial biotechnology (especially algae-based biofuels), biologics R&D, stem cell therapies, and health IT technologies.
One of the recurring comments throughout the evening is the limiting effect that life sciences mergers and acquisitions have on San Diego’s innovation economy. “The knock on San Diego is that [startups] get to a certain size and then you get sold off,” said Adam Simpson, the former chief business officer and a co-founder of San Diego’s Meritage Pharma. As a result, relatively few life sciences companies here remain independent long enough to grow into a multi-billion dollar global enterprise.
Mergers and Acquisitions activity in San Diego totalled a “staggering” $13.8 billion in 2012, according to the Jones Lang LaSalle report—including AstraZeneca’s acquisition of Ardea Biosciences, Hologic’s purchase of Gen-Probe, and Bristol-Myers Squibb’s buyout of Amylin Pharmaceuticals.
Whether that’s good or bad, however, was a matter of some debate.
To Scott Forrest, vice president of business development at The Scripps Research Institute, the prevailing pattern of buyouts in San Diego contributes to a scarcity he sees in late-state commercialization of new therapeutics. San Diego’s drug startups seem to invariably get “sucked back to Indianapolis, or Groton, or wherever,” Forrest said. Many biotech founders elect to remain in San Diego to start new therapeutic companies. But he argued, “We’ve been a little challenged in San Diego” in terms of increasing the pool of leaders who have experience in late-stage commercialization the way that Genzyme has in Boston or Genentech has in the Bay Area.
Matt Dixon, director of business development at Advanced Proteomics, had a different view. “San Diego has done a great job of retaining and redeploying senior leadership and then matriculating junior leadership through the next generation of companies,” Dixon said. “My CEO Peter Klemm was the CEO of GeneOhm Sciences. Erik Holmlin, who was the scientific co-founder of GeneOhm Sciences, is now leading BioNano Genomics. Chris Hibberd out of Biocite is now leading Astute Medical. The previous CEOs who have had success stay here. Then they go on to the next success.”
Simpson later offered the analogy that Big Pharma is like Big Oil. “The premise is that Big Pharma will someday be like ExxonMobil, and own the pipes and infrastructure—and we are the wildcatters,” Simpson said. Seed-stage startups proliferate in San Diego, and we’re good at that here. “Some of them will hit, and some of them will hit hard,” Simpson said. “But why the hell would you build more pipes?”
“What uniquely positions San Diego is the fact that we have this great underlying core expertise in diagnostics, and basic, fundamental discovery,” said David Nelson, the CEO of Epic Sciences. “But we have enough of the pharmaceutical and therapeutics expertise—and we are geographically contiguous, so we can really drive that synergy. In the Bay Area, for example, it’s geographically so diverse that it’s hard to get a critical mass. L.A. is the same way. Where San Diego can really shine is in bringing all these great, diverse perspectives together to capitalize on the brave new world in healthcare, which is a combination of diagnostics and [therapeutics].”
Others agreed that it’s clear the industry is moving to “companion diagnostics,” with the idea of using genetic diagnostics to identify the most-effective therapy for treating specific types of cancer, inflammatory diseases, and other maladies.
“I’m a genomics guy and I think we’re going to see lots of genomics companies springing up here in the next decade,” said Todd Dickinson of BioNano Genomics. “But it’s all about getting to the clinic.”
“We’re winning in a lot of the areas that are favorable in terms of future dynamics—whether it’s algae, genomics, or diagnostics,” said former SkinMedica senior vice president Ted Ebel. “Ultimately, though, I think the question is what percentage of the value chain does that represent? Historically, diagnostics has not been a huge part of the value chain.”
One of San Diego’s core areas of expertise lies in the discovery and development of large molecule drugs, said Anaptys Bio CEO Hamza Suria. “Not from a medicinal chemistry perspective, but from a biologics perspective, San Diego probably outperforms” the comparable per capita indices in San Francisco and Boston, he said.
“For me, San Diego has a fundamentally different feel” than either San Francisco or Boston, said Suria, who has lived in both places. “It feels a whole lot less consolidated and a whole lot more fragmented. Maybe you can take that as a negative if you don’t have a big anchor institution…But actually I think fragmentation is helpful from a drug discovery level. You get a lot more innovation if people are not sitting on the exact premise and approaches and logic that are used within Genentech [in South San Francisco] or at Biogen Idec in Boston… There are plenty of smart people here, and they are forced to innovate new tools and new approaches, and I don’t think that happens as much in San Francisco and Boston.”
San Diego already has become a capital for industrial biotechnology, according to Cellana CEO Martin Sabarsky. “No other area in the world has the same concentration of algae-based biotech companies as San Diego,” Sabarsky said. “There’s Sapphire Energy, Synthetic Genomics, Cellana, General Atomics, Verenium. When it comes to algae—which really is a platform technology that’s kind of going to transform fuel, feed, and nutrition—we have a very disproportionate share of the deals and funding.”
Attendees said bringing together San Diego’s academic, biotech, and computer science sectors could accelerate innovation in emerging fields with high growth potential, such as health IT, wireless health, and bioinformatics. Venture capital funding also can be invested more efficiently in IT startups, which could prove to be an advantage when venture capital funding for life sciences in general, and therapeutics in particular, is expected to continue to tighten nationwide.
In 2012, when venture capital funding for life sciences fell nationwide, venture investments surged in San Diego by nearly 19 percent, to more than $709.2 million, according to the MoneyTree Survey from PricewaterhouseCoopers, the National Venture Capital Association, and Thomson Reuters. VC investments in San Diego’s life sciences sector also have remained fairly constant over the past decade—ranging from a low of $544.2 million (in 79 deals) in 2010 to a high of nearly $1.1 billion (in 80 deals) in 2007, according to the MoneyTree data.
Nevertheless, it’s a different environment for life sciences startups these days.
“The difference between 2007 and 2013 is dramatic,” said Nelson of Epic Sciences. It used to be that FDA approval was the final hurdle for new therapeutic companies. Then drugs could be sold, and up-sold, to the broadest possible market. Now Europe is adopting a pay-for-success approach, and the U.S is expected to follow suit as healthcare moves to targeted therapeutics, with expectations of guaranteed results.
To justify the cost of therapies that can easily exceed $100,000 per treatment, pharmaceutical companies will need to demonstrate the effectiveness of their drugs on a case-by-case basis, or risk not being reimbursed, Nelson added. As a result, advanced diagnostics is becoming an increasingly important part of clinical trials and will accompany new drugs right through to precision treatments.
While the geographic contiguity of San Diego’s life sciences cluster is an advantage, Boston and New York hold an advantage in their proximity to Europe, where many of the major pharma companies are based. On the other hand, as Biocom CEO Joe Panetta later pointed out, San Diego is a portal to the expanding pharmaceutical business throughout the Pacific Rim.
“As healthcare goes forward, big data and electronics is the answer, and I think San Diego is well positioned,” said Cypher Genomics CEO Ashley Van Zeeland. “There is a tremendous opportunity there. We just need to capitalize on that.”
In attendance at the dinner—which was sponsored by Biocom, the Kilpatrick Townsend law firm, and Alexandria Real Estate Equities—were Nimesh Shah of Domain Ventures, Martin Sabarsky of Cellana, Scott Forrest of The Scripps Research Institute, Hamza Suria of Anaptys Bio, Peter Chu of Eclipse Therapeutics, Todd Dickinson of BioNano Genomics, Michael Kamdar of Genoa Pharmaceuticals, David Nelson of Epic Sciences, Matt Dixon of Applied Proteomics, David Urso of Tioga Pharmaceuticals, Ted Ebel of SkinMedica, Jennifer Cayer of Rempex Therapeutics, Ashley Van Zeeland of Cypher Genomics, Keith Murphy of Organova, Adam Simpson of Meritage Pharma, Carmine Stengone of Avelas Bioscience, Michelle M. Hanna of RiboMed Biotechnologies, Jason Moorhead of Alexandria Real Estate Equities, Xconomy San Diego Editor Bruce V. Bigelow and contributor Juliet Preston, Joe Panetta and Jennifer Landress of Biocom, and Kenneth Jenkins, Stephen Reiter, and Kandace Watson of Kilpatrick Townsend.