California's Biomedical Industry is Poised for Growth
despite Increasing Global Competition 

Eighty percent of biomedical company CEOs in California report that their companies
have been courted by other countries, state governments or regional economic development
associations in the past year, according to survey findings included in the 2011
California Biomedical Industry Report, published today by the California Healthcare
Institute, BayBio and PwC. Yet the survey found surprising consensus of confidence in
the state's ongoing attractiveness to the biomedical industry, with many CEOs planning
to increase jobs, manufacturing, research and development operations within California
versus elsewhere.

Still, the danger for the U.S. and California is that other parts of the world are
quickly catching up, warns the report. The survey of CEOs found that the unique
ecosystem that has helped to build California's leadership in biomedical technology
innovation may be fragile and short-lived unless both government and industry adapt
to new challenges. 

• Sixty-seven percent of CEO respondents said that within five years, another
        country could conceivably recreate the ecosystem that has made the U.S. the
        leading biomedical region in the world

• Sixty percent believe that another state could recreate the ecosystem that has
        made California the leading biomedical region in the U.S.

The 105-page report provides insight into California's rise to global leadership in
the biomedical industry and the impact of the industry's presence on the state. 
California is home to the biggest concentration of biomedical companies, researchers,
entrepreneurs, suppliers, venture capitalists and workers in the world.  Despite
increased competition and proliferation of biomedical and medical technology innovation
overseas, California remains the industry's global leader and it stands to grow even
larger as the U.S. epicenter of biomedical innovation. At the forefront of new
developments in biologics, the fastest growing segment of the global biopharmaceutical
industry, California has the largest clustering of companies and more products in
clinical development than any state in the U.S. or any other country in the world. 

Confidence in California and the outlook for the industry is evident in the findings
of the reports' CEO survey:

• For the first time in the report's 17-year history, nearly twice as many
        biomedical CEOs said they intend to increase manufacturing within California
        (41 percent) versus outside the state (21 percent) over the next two years

• Sixty-eight percent of CEOs said they expected to expand the overall size of
        their workforce within California, while only 31 percent planned to increase
        workforce levels outside the state

• Seventy-eight percent of CEOs surveyed said that they maintained or expanded
        R&D operations within California over the past year, and 88 percent plan to
        do so over the next two years, with the majority of those (62 percent) saying
        that they expect to expand R&D within California

• The key reasons cited for locating in California were the availability of a
        highly skilled, entrepreneurial workforce and California's culture of innovation,
        anchored by leading research universities

• While relocating out of state was not a strategy cited by CEOs surveyed, when
        asked about the most attractive U.S. biomedical markets outside California, 76
        percent named Greater Boston followed distantly by North Carolina (31 percent),
        Minneapolis-St. Paul (25 percent) and the Washington-DC corridor (20 percent)

"The most resilient of the state's high-tech industries after the economic downturn,
 the biomedical industry is poised to lead California's economic recovery," said David
Gollaher, CEO of California Healthcare Institute.  "Yet the pace of the industry's
progress could be slowed by cost pressures, declines in venture capital funding,
particularly for early stage developments, and regulatory inefficiency and uncertainty
at the FDA."

Biomedical Industry in California
According to the 2011 report, the biomedical industry directly employs 268,000 people
in California, a workforce second only to the state's information technology sector,
and approximately twice the size of the motion picture industry. The biomedical sector
supports another 783,000 people – 13.8 percent of the state's total workforce – who
hold biomedical industry-related jobs across diverse sectors.  The biomedical industry
accounts for approximately $59 billion in direct wages and $86 billion in related
personal income that contribute to California's tax base.  Large, diverse and distributed
throughout the state, California's biomedical industry is concentrated primarily in
four clusters around academic research centers in San Francisco, San Diego, Los Angeles
and Orange County and surrounding counties of Riverside & San Bernardino, Sacramento,
Ventura and Santa Barbara.  Approximately 40 percent of jobs are in the medical devices,
instruments and diagnostics sectors, 30 percent in biopharmaceuticals and 16 percent
in academic research. 

While employment levels in biomedical industry fared better than most other industries,
they have felt the effects of the economic downturn and changing dynamics of the
healthcare market.  

• For the first time in five years, in 2009 biomedical employment declined in
 California by nearly 6,000 jobs 

• Still, cumulative growth over the past five years remains positive. Between
 2005 and 2009, the biomedical industry added nearly 12,000 jobs in California, with
 academic research and biopharmaceuticals growing at an average annual growth rate of
 more than 2.3 percent and wholesale trade by 1.5 percent. The two sectors where
 employment has declined are in laboratory services and medical devices

• Employment declines varied by cluster.  Biomedical industry employment in
 San Diego and Sacramento counties continues to grow, offsetting losses in
 the Bay area and Riverside and San Bernardino counties.    

Access to Capital
Another year of declines in venture capital funding, the lifeblood for the country's
innovative new companies, could significantly threaten the future of the biomedical
industry. California companies attract more venture capital investment in life sciences
than any other state, divided between biotechnology and medical device companies.
According to the PricewaterhouseCoopers/National Venture Capital Association
MoneyTree Report with data provided by Thomson Reuters, California life sciences
companies attracted $2.5 billion in venture capital funding in 2010, down from
$2.7 billion in 2009 but still more than any other high-tech sector in the state.
"The demand for innovative pharmaceuticals, diagnostics and devices are expected to
grow as healthcare delivery becomes more outcomes-focused and medicine becomes more
personalized and targeted," said Tracy Lefteroff, National Life Sciences Partner at
PwC U.S.  "This represents a tremendous opportunity for the investment of private
capital, but companies will need to work more collaboratively with the public sector,
the investment community and other health sectors to minimize risks and maximize
return in the new healthcare landscape." Lower risk tolerance among venture capitalists
is reflected in their funding trends.  Whereas venture capitalists historically have
funded device, diagnostics and pharmaceutical R&D firms from start-up through
development and commercialization, trends indicate that venture capitalists have
shifted their support to companies in late-stage development. Respondents to the
CHI/BayBio/PwC Survey anticipate that the next two years will find them in a
holding pattern at best, navigating risks with a great deal of uncertainty about the
future.

• More than two-thirds of CEOs surveyed (69 percent) reported that R&D projects
 had been delayed, and the number one reason cited (44 percent) was the lack of
 funding
 
• Forty-eight percent of respondents said they were somewhat or very likely to
 participate in a merger or acquisition over the next year while 51 percent said
 they were very or somewhat unlikely to do so.

• Only 9 percent of respondents said they were likely to participate in a sale
 or divestiture in the coming year

Opportunities and Barriers to Growth
With the economy and biomedical industry funding environment showing some initial signs
of recovery, the 2011 CEO survey sought entrepreneurs' thoughts on sustaining growth. 
Workforce development surfaced as the single most important issue among survey
respondents. Failure to encourage workforce development and growth was cited by CEOs
as the greatest threat to the future of California's biomedical industry.  Nearly half
of the respondents ranked "an unprepared workforce" among the top three threats to the
biomedical industry.

• Among issues deemed either somewhat or extremely important to keeping biomedical
 research, innovation and investment in California, the elimination of duplicative
 regulation by state and federal regulators was cited by 80 percent of respondents,
  workforce development was cited by 67 percent, and R&D tax credits were cited by
 67 percent

• Other high ranking threats point to the complexity of thriving in the life
 sciences sectors as companies adapt to changing rules and regulations. Thirty-six
 percent of respondents said that lack of data to demonstrate product safety and
 effectiveness is a top threat to their business.  And 35 percent said that
 liability of products on the market is a threat

• Survey respondents also ranked federal policy issues as somewhat or extremely
 important to their operations.  Eight-four percent of respondents believe that
 the FDA regulatory approval process has slowed the growth of their organizations.

• More than three-quarters of respondents predict that the cumulative impact of
 changes in the healthcare marketplace, driven largely by health reform, will
 decrease their profit margins and 54 percent believe that the pace of innovation
 will slow.

"We challenge California's leadership to pledge support for the life sciences community
through legislation, regulation and support for state-level investment, particularly
policies which support innovation," said Gail Maderis, president and CEO of BayBio.
"The life sciences community urges the state's leadership to support core state programs
that will drive innovation over the next 10 to 15 years.  We look forward to working
with our companies, investors and elected officials to continue bringing a robust
pipeline of therapies to the patients who need them."  A full copy of the 2011 California
Biomedical Industry Report is available at www.chi.org; www.baybio.org or
www.pwc.com/Calbiomedical2011.