By David Morrill, Business Writer
Inside Bay Area
PARTICIPANTS network at the Gene Acres pharmaceutical conference in South San Francisco. RON LEWIS Staff photos
FOR THE BETTER PART of its 31-year existence, the biotech industry has been about its research and innovation. Thousands of prospective drugs and therapies made the daunting and time consuming journey from labs to clinical trial.
But drugs like Herceptin, Gleevac and Rituxan, did finally make it to the bedside of patients after billions and billions of dollars had been spent. The nascent industry not only survived, but now is poised to thrive.
Today the industry is all grown up and is now ready to cash in.
It took 28 years, from 1976 to 2004, for the biotech industry to be worth $50 billion in revenues. Now it is expected to double that, to $100 billion, by the end of the decade, according to industry analysts Ernst & Young.
"For the first time in its life, we'll see the market become dramatically commercial," said Matt Gardner, president of BayBio, a trade association for the life sciences industry in Northern California. "Suddenly, a lot of these companies that were all about research will be product companies for the first time."
As other industries try to navigate the latest economic challenges through consolidation, this industry is booming. And the driver of the movement is right here in the Bay Area.
"Biotech is one of the great growth stories right now," said Scott Morrison, of Ernst & Young. "There is no other technology industry that would be able to maintain 700 public companies and some 5,000 private companies and survive this long, but biotech has been able to do it because of its great innovation."
Besides being able to cash in on some of its early research, the biotech industry has bloomed because it has been able to attract the respectful eye of large cash-rich pharmaceutical companies.
The smaller companies that suddenly have approved products will need capital to help make them marketable. On the flip side, pharmaceutical companies need new products to re-energize pipelines that are drying up as important patents expire.
Because of the need for one another, they've had to come together either through acquisitions or partnerships.
"In years to come, we will see a convergence between pharmaceutical and biotech where we will not be able to distinguish between the two," Morrison said.
At BayBio's Gene Acres conference in South San Francisco last week, Morrison delivered a state of the industry report. Discussions were upbeat as industry officials pointed towards a healthy number of potential products in late stage clinical trials or seeking approval, double-digit revenue growth, and renewed interest from venture capitalists as evidence of promise.
In the numbers that reflect the strength of the sector, most are coming off a strong previous year. From 2005 to 2006, revenue growth in the industry was BIOTECHIBusiness 2up 15 percent to almost $60 billion. Research and development expenses were up 36 percent to almost $25 billion.
In South San Francisco, considered the Bay Area's "center" for biotechnology, the number of employees has grown about 62 percent in the last 5 years from about 8,400 in 2002 to 13,740 today.
"The great thing about the biotech industry here is that it is counter cyclical and has nothing to do with how the national economy is doing," Gardner said.
Although past years have seen a handful of other cities — such as Seattle, Los Angeles and New York — trying to attract the interest of biotechnology companies, numbers presented at the conference showed that the three major centers of the industry are the Bay Area, San Diego, and Boston.
"Honestly I think the race in the United States is over, and the industry is going to remain concentrated in those three areas," Morrison said.
Bay Area on top
And within those three, in research and development, the Bay Area sits on top.
"Folks in the Bay Area have a much better sense that their growth opportunities are on track," Gardner said.
In Northern California, 19.1 percent of the total office market (21 million square feet), is devoted to life sciences, of which the vacancy rate is less than 7 percent, according to Cushman & Wakefield research released by BayBio at Gene Acres. In comparison, the space in Boston and San Diego is much more constrained, with only 21.2 million square feet of life science space combined.
In Boston, only 5.9 percent of the office space inventory is devoted to life science.
An additional 3 million square feet of life sciences space is currently under construction in the Bay Area.
At Mission Bay in San Francisco, more than 450,000 square feet of new projects are slated for delivery in 2008, BayBio said.
In July, Gilead Sciences completed a 63,000-square-foot biology and chemistry laboratory building from the ground up.
Also in July, across the Bay in Emeryville, the shell of a 245,000-square-foot project, at 5885 Hollis Street, was completed and is half leased. It will provide lab space for research in life, physical and nano sciences.
On the outskirts
Even areas on the outskirts of the Bay Area have become hotbeds of interest for both biotech and pharmaceutical companies. Genentech, Novartis and Johnson & Johnson, for instance, all have footprints in Vacaville. Genentech, the Bay Area's largest biotech company, recently completed the second phase of construction that when completed will be about 900,000 square feet and employ about 1,500 employees.
Overall, Genentech plans to grow from 2.8 million square feet on 124 acres to 6 million square feet on 200 acres by 2014.
"The Bay Area growth numbers speak for themselves," Morrison said. "Not only because of the companies like Genentech, but also because of the success of some of the second-tier companies like Onyx (in Emeryville) and Genomic Health (in Redwood City)."
Currently there are about 900 life science companies in the Bay Area with a total of about 90,000 employees and more than $6 billion in payroll, according to BayBio's "Impact 2007" report. In 2006, the industry added more than 6,000 jobs.
No better place
"There's no other place in the world where you can find that many companies and that many employees all within a one and a half-hour drive of each other," said Daniel Perez, a venture capitalist, when the report was first released. "If you want to go into biotech, there's no better place in the world than right here."
As the biotech industry is expected to continue to flourish, the makeup of it has evolved significantly since it was first founded by Genentech more than 30 years ago.
One of the key indicators of the strength of the industry is how much venture capital money is being drawn in. Already in just the first half of 2007, venture capital money raised (more than $3 billion) has nearly equaled all of 2006.
"From April to October, we have really seen a massive jump in that area as more investors are getting behind the innovation," Gardner said. "I think more so than last year, companies have a better grasp as to where their money is going to come from."
Challenges
Although the Bay Area is in a commanding position within the industry, there are some challenges as well.
"Just as the Bay Area has many advantages to it, the cost of living in the Bay Area has to be considered as an important disadvantage as well," said Shehnaaz Suliman, director of corporate development for Gilead Sciences. "In Foster City it has made it a little more challenging to try and recruit talent from outside of the area."
Fortunately, with several major universities, such as UC Berkeley, Stanford, UC Davis and UC San Francisco, there is still a wealth of talent already here to choose from.
"With the innovations of the companies, the great academics, and the Sand Hill Road folks strong in financing, the Bay Area is absolutely the place for a biotechnology company to be," Morrison said. "As long as their industry is producing great innovation, it will continue to do well."
David Morrill can be reached at dmorrill@bayareanewsgroup.com and 925-977-8534.
