Bioindustry: A Description of California's Bioindustry and Summary of the Public Issues Affecting Its Development
By Gus A. Koehler, PhD.

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BIOINDUSTRY IN THE U.S., CALIFORNIA, AND THE WORLD


National Bioindustry

Biotechnology is still a new field with many broad applications. The federal government does not yet classify it as a specific industry with its own standard industrial classification (SIC) codes. As a result, there are no official sales estimates for bioindustry products and services, nor are there employment estimates. All bioindustry data must, therefore, be viewed with some caution.

Unofficial U.S. Department of Commerce sales estimates indicate that shipments of bioindustry products (including human therapeutics and diagnostics, agricultural products, specialty products, and non-medical diagnostics) have grown rapidly, from $350 million in 1986 to $4 billion in 1992. (See Chart 1.) The Department expects sales to increase 15 to 20 percent per year over the next five years. The accounting firm of Ernst and Young has estimated that industry-wide sales increased by 20 percent (from $4.3 billion to $5.2 billion) from fiscal years 1992-93 to 1993-94, [63] and by an additional 21 percent for fiscal years 1995-1996 (from $5.6 billion to $6.8 billion). 64 The Federal Coordinating Council for Science, Engineering and Technology estimates that by the year 2000 bioindustry will have sales of $50 billion in the United States. 65 By any estimate, the potential of the industry is enormous.

Sales of biotechnology products are distributed among several categories, as summarized in Chart 2 for 1992 by Ernst and Young.

Medical products (therapeutics and diagnostics) are the largest market segment in the industry, representing from 70 percent to 90 percent of sales. Although agricultural bioindustry products have a great deal of potential and have received much press attention, medical drugs and testing have thus far been the most important commercial markets.

California's Bioindustry

California's bioindustry sector generally follows the national pattern, with therapeutic and diagnostic products having the largest number of companies, sales, and developing and approved products. There were an estimated 1,272 to 1,311 public biotechnology companies and subsidiaries in the U.S. in 1995. 66 This number decreased slightly in 1996. However, the number of people employed in the industry grew by an estimated 13 percent the same year. 67 Nationally, while segments of the industry are increasing employment others have begun downsizing or refocusing their operations in an effort to deal with capital problems. Twenty-nine percent to 32 percent 68 of all U.S. firms are located in California. This estimate does not include the many technical and service businesses that support biotechnology research and manufacturing efforts. When these supplier companies are included, there may be as many as 800 bioindustry-related firms in California. Bioindustry companies tend to be new, small, and near leading research institutions.

Businessweek magazine has identified 58 biotechnology firms that are developing "blockbuster" drugs of the future; nearly half are California firms.

There may be as many as 1,000 biotechnology-related firms in the Bay Area alone, using a broad definition of the term (including medical devices and pharmaceutical companies). 69 The San Francisco Bay Area, San Diego, and Los Angeles/Orange County regions have impressive bioindustry clusters (see Table 2, below).

California biotechnology firms generally concentrate their activities around human diagnostics, pharmaceuticals, and therapeutic applications. Despite the importance of agriculture to California's economy, the state's biotechnology industry does not appear to emphasize agricultural applications of biotechnology. 70

California's bioindustry product is research oriented and is beginning to move into manufacturing. Only three companies have FDA approved drugs and all three are manufacturing in California. The state's pharmaceutical industry has historically not manufactured drugs and related products. The American pharmaceutical industry is primarily located on the East Coast. 71 As a consequence, many small California companies are developing partnerships with or are being purchased by large pharmaceutical manufacturers located in other states or nations in order to move their products to market. This is unfortunate, particularly given the state's investment in the University of California, whose faculty research has produced many of the scientific breakthroughs and new start-ups. A manufacturing jobs pay-off would be beneficial to the state's economy. 72

Employment

It is difficult to determine the number of Californians employed in bioindustry because data categories overlap with many other high technology industries. The California Health Care Institute estimated that approximatly 131,000 Californian's are employed in the industry with an average wage of $58,233 in 1996. 73 Estimated 1991 bioindustry employment data in Table 3 below show that California has captured a significant portion of jobs in several sectors. (For comparison, California has about 12.5 percent of the national economy and 13 percent of population.)

A 1988 study of the San Francisco Bay Area's bioindustry provides an additional perspective. Companies were divided into two groups: biotechnology research and production; and materials technology. Materials technology (chemicals and special products such as growth factors, proteins, etc.) supports the service needs of biotechnology research and production firms. The two sectors depend on each other to carry out their activities. Table 4 provides an estimate of the number of people employed in each sector, as of 1988, with projections through the year 2000.

The Bay Area data (Table 4) indicate that the fastest growth may be in the materials technology component of bioindustry. Barriers to market entry are fewer and start-up and lead-time costs are lower. New products are thus able to move into the manufacturing

phase more quickly. 74 Additional job growth is predicted in the diagnostics and therapeutics sectors. San Francisco Bay area researchers found "the employment growth rate in other industry sectors (including bio-agriculture, medical devices, and instrumentation) is expected to average 6% to 8% annually through the decade." 75

The Los Angeles region (Los Angeles, Orange, Riverside, San Bernardino and Ventura Counties) ranks sixth nationally in the number of companies. There are an estimated 28 to 68 biotechnology firms in the region, depending on definition of the term. 76 Biotechnology employment is expected to grow at least as fast in this region as it is in the San Francisco Bay Area.

San Diego's bioindustry employment grew by nearly 14.7 percent in 1993, particularly in agricultural technology, orthopedic/prosthetic devices, pharmaceuticals, and scientific devices. The lowest rate of employment growth occurred in optical and ophthalmic products, biomedical instruments, chemicals, and medical devices. 77 An estimated 20,000 San Diegans are employed in bioindustries; as many as 45,000 people could be employed by the year 2000. 78

Over 32 percent of the 1,300 biotechnology firms in the United States are located in California. These 400 companies plus nonprofit research institutions employ approximately 50,000 to 65,000 workers. Recent estimates project a national biotechnology workforce of over 105,000 by the year 2000, and the biotech workforce in California could increase by at least 12,000 to 20,000 new jobs by the end of the 1990s. 79

Although the industry is relatively small when compared to manufacturing or services, there is a great deal of "spin-off" employment associated with it. For example, each job in the pharmaceutical industry results in an estimated 5.5 additional jobs in the economy from purchasing inputs and consumer spending. This multiplier of 5.5 is much higher than for most other industries, which typically have multipliers ranging from two to three. In the case of biotechnology, investment in plant equipment and other physical resources is very high per employee. There is also a large value added per worker, since pharmaceutical firms produce relatively high-value goods and services. Employment increased in the California pharmaceuticals industry during the late 1980s and early 1990s: "Manufacturing employment for pharmaceuticals and medical devices is up 45 percent since 1984 to 70,000 in California] ." 80

Sales, Revenues and Markets

California's estimated 800 bioindustry firms generated $2.6 billion in product sales and $5.5 billion in total annual revenues (licensing, and contract research for example) in 1993. 81 Chart 3 shows revenue shares of the three major biotechnology regions in California. The San Francisco Bay Area is the leading U.S. region, with total revenues of $1.748 billion in 1992. Los Angeles and Orange Counties follow closely with revenues of $1.544 billion. New England is a distant third, at $0.900 billion. These three U.S. regions account for over two-thirds of industry revenues. San Diego is also a major U.S. biotechnology region with revenues of $223 million in 1992. California's portion of the nation's biotechnology employment dropped during the recessions of 1974-75, 1981-82, and 1990-94. 82

Each California region has a distinctive market concentration. The Oakland-Alameda area (East Bay) has the highest concentration of therapeutics firms (for example one firm produces a clot dissolver to help heart attack victims). Los Angeles, San Diego and San Francisco area firms tend to emphasize diagnostics (monitoring blood chemistry), while Santa Clara Valley firms specialize in biotechnology supplies. Firms in Sacramento and rural Southern California generally specialize in agricultural technology (agritech). 83

Bioindustry Suppliers and Construction

Biotechnology industry growth can have a positive effect on non-manufacturing industries. 84 For example, in the five-year period 1987 to 1991,

[67 biotech companies] spent a total of $1.34 billion on construction, renovation, and expansion of facilities, not including expenditures paid for by landlord buildout allowances . . . . Survey respondents cumulatively spent $164 million for rental or real property . . . . The bioscience industry today utilizes more than 10.7 million square feet of real estate in Northern California. Of the space usage reported in the survey, 44% is for laboratories, 32% for offices, and 24% for manufacturing. 85

This level of construction expenditures, accounting for 8 to 10 percent of the value of all commercial construction and industrial building permits in the Bay Area during that period, reflects the industry's youth and vigorous expansion.

Much of San Diego's bioindustry development has occurred near the University of California, San Diego, in La Jolla. The City of San Diego has created a Scientific Research Zone near the university to encourage a synergetic relationship with bioindustry. The research zone offers new land for development, and in some cases new roads and other infrastructure. 86

Factors Contributing to Regional Development of Biotechnology in California

A "critical mass" of biotechnology companies and proximity to major research universities are important for start-up firms and for the development of a regional bioindustry industrial cluster. 87 Regional clustering encourages and facilitates constructive linkages between bioindustry firms. A regional industrial cluster is defined as all of the "competing, complementary, and interdependent industries within a region that are related to each other through buyer-supplier linkages and shared economic foundations, such as a skilled workforce or common technology base." 88 An industrial cluster allows for joint venturing, sharing of expertise, a larger skilled labor pool, and better access to technical knowledge. Linkages also extend to universities, venture capitalists, and firms in other states and nations. 89 The ability to form both formal and informal networks between large and small businesses--particularly international ones--is crucial for bioindustry cluster success. 90

In contrast, there is only a weak link between the development of bioindustry firms and other high-tech firms in the same region. The biotechnology industry generally appears to thrive on a special set of factors not necessarily required by other high technology industries. One reason may be the relationship between location and a strong single-market orientation (diagnostics and therapeutics), such as medical biotechnology firms in San Francisco and San Diego that have large populations or agriculture in Sacramento. 91This finding suggests that biotechnology may emerge in parts of the state that do not have existing high technology industries but that do have factors important to biotechnology, such as related university research and a trained technical workforce.

Start-up biotech companies are focused almost entirely on research and development, and consider traditional economic development location incentives (such as cost of space, local regulations, wage rates, or taxes) as only marginal inducements: 92

. . . the kinds of specific tax break, grants, and subsidy carrots dangled by economic development authorities in front of biotechnology companies do not play a large role in those companies' decisions to establish facilities in one place rather than another. 93

Biotechnology companies tend to locate their R&D laboratories close to corporate headquarters or in a region that has a high number of research universities. 94 The availability of well trained scientists, a nearby research university, and various quality of life considerations are important, as is a strong local education system which provides well trained technicians. The last point is particularly important since it is costly to import large numbers of trained workers, a problem that European biotechnology companies are currently facing.

Availability of bank financing and venture capital is also important to startups. 95 Once a region develops a core set of companies and suppliers that are working closely together, additional growth is more likely. 96 Since most biotechnology companies are relatively new and small, they tend to be more vulnerable to economic slowdowns than larger, more established firms. Lacking proven products, they find it difficult to obtain funding to continue.

Table 5 identifies factors that are important to biotechnology manufacturing firms in deciding where to locate. "Net percentage" in each box refers to the percentage of firms which find a region to be advantageous, minus the percentage which find it to be disadvantageous for that factor. For example, a strongly positive score (e.g. East Bay ranking of 80 percent for "available raw materials") means that the vast majority of firms consider the factor be very positive in the region. On the other hand, a high negative score (for example, the Los Angeles ranking of -91% for "cost of industrial space") means that the majority of firms consider that particular characteristic to be disadvantageous for locating biotechnology manufacturing in that region. The closer the percentage is to zero the more disagreement among firms. The data in Table 5 indicate that the strongest location factor in all regions is closeness to research and development laboratories. This finding is good news for California, which has many such laboratories.

Since regional biotech industries tend to locate in specialized clusters, their distinct requirements affect the location factors that each company considers desirable. For example, bioindustry firms in the San Francisco East Bay region are primarily suppliers, and thus find the availability of raw materials and closeness to markets to be highly attractive. In contrast, neither of these factors are important for Santa Clara firms who are research oriented.

Unlike start-up companies, more mature companies entering the manufacturing stage consider taxes, the cost of land, and other costs to be important. Selecting a site for bioindustry manufacturing is a long-term issue, given the high cost of building a bioindustry manufacturing plant and relocation costs. 97 Genentech's decision to place a manufacturing plant in Vacaville illustrates how all of these factors come together. The new plant will be located relatively close to corporate research headquarters in the San Francisco Bay Area and to University of California Davis, a major biological research institution that educates many skilled workers:

. . . the firm was swayed by a state investment tax credit worth up to $6 million and a research and development tax credit. . . . Genentech is also benefiting from a pending $3.2 million federal economic development grant, a $10 million state grant to retrain workers, a $4 million property tax rebate by the city and Solano County, and a waiver of $1.8 million in permit fees and sewer costs. Pacific Gas and Electric also cut the company's energy rates. . . . [T] he low cost and high quality of living in the city . . ., [and] the area's safety from earthquakes [all played a role] . 98

Puerto Rico is another example of the location value of business tax credits. The federal tax code grants significant tax credits for businesses which locate in Puerto Rico, a concession that has helped to attract more than forty pharmaceutical and related firms. (The tax credit will be reduced to 40 percent in 1998.) A trained local Puerto Rican workforce also helped attract bioindustry manufacturing companies. 99

International Competition for Biotechnology Markets

Although the discussion above has focused on biotechnology and bioindustry in California and the United States, biotechnology is an international industry. The U.S. remains the world center for research in pharmaceuticals, and the world's largest market, accounting for 67 percent of world sales. The top five countries for U.S. export are Japan, Germany, Italy, and France. U.S. producers dominate about 40 percent of the U.K. and European drug markets. Much of the success of U.S. producers results from local research and development and manufacturing operations. The top five countries that sell biotechnology products in the U.S. are the United Kingdom, Germany, Switzerland, Japan, and Ireland. The U.S. pharmaceutical industry has consistently maintained a positive trade balance in international markets over the past few years (exceeding $1.3 billion in 1992).

Many California bioindustry firms are not knowledgeable about nor do they have direct access to international marketing and distribution systems. Joint ventures and other methods of joining with large multinational pharmaceutical corporations are common strategies in California and around the world for dealing with these shortcomings.

Competition for global markets is intense. Various state and national policies encourage companies to develop local manufacturing and/or research and development as a way of controlling their own markets and keeping jobs at home. Following are brief descriptions of policy approaches used by several selected European and Asian countries to develop and attract bioindustry.

Belgium

Germany 100


Indonesia 104

Netherlands 105

Singapore 106

United Kingdom 107

The European Union has instituted new regulations so that products approved by individual member counties are deemed approved for the entire region within 120 days. 111

Next Chapter: Regulation of Biotechnology

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