Slow recovery for life science

The industry is still restructuring from the pandemic-induced bubble, said Michelle Nemits, executive director of the Bay Area office of Biocom California, which saw record levels of federal funding and venture capital flowing into vaccine production and distribution. Since then, the sub sectors with the steepest job losses involve pharmaceutical and medical equipment manufacturing. 

Righting the ship will likely take longer than anticipated. So far this year, the county’s life science layoffs are similar to this time in 2023. Life science giants on the Peninsula, such as Gilead, Genentech, Sanofi and Bristol Myers Squibb all announced job cuts this quarter, and last year’s workforce reductions were the highest the industry had seen in the county in at least eight years. 

State and federal regulations and funding levels have also thrown a wrench in financial projections. Dollars from the National Institutes of Health are less free-flowing than during COVID-19, and the 2022 Inflation Reduction Act changed patent exclusivity timelines for certain drug classes. 

“That is changing the calculation a little bit in terms of how companies are thinking about how they're going to backfill their pipelines and their revenues based on these new and potential gaps that are coming,” Nemits said.

The estimated $28 billion state budget deficit also means benefits such as the research and development tax credit could shrink. And many municipalities, including South San Francisco — long considered the region’s biotech epicenter — are now feeling the pressure to update their business license tax structures to drive more revenue, which would hit large companies’ pockets most. Perhaps the biggest driver of the industry’s protracted rebound is due to continuously low venture capital funding. While not unique to the industry — nationally, venture funding dropped by about 20% between last year and this year’s first quarters — it remains a key piece to recovery.

“The industry relies heavily on venture capital in particular, and that is driven by making bets, if you will, that the investment is going to pay off at some point, or that one in 10 investments will pay off,” Nemits said. “And when the IPO markets are down, and the cost of capital is high, it puts a little bit of a damper on activity.” 

In response, mergers and acquisitions have become more attractive for both large and small companies. Patent expirations in the post-IRA landscape are motivating pharmaceutical firms to seek more revenue opportunities, and smaller biotechnology companies are reacting to “rising interest rates alongside a sharp inflationary environment,” according to the report. South San Francisco’s Biogen’s $1.1 billion acquisition of HI-Bio was announced last month, and partnerships between multinational corporations and startups, such as Foster City’s Gilead and South City’s Cartography Biosciences, have also become more commonplace. 

The Bay Area still remains the dominant life science hub in the state, comprising approximately one-third of its total workforce, much of that coming from San Mateo County. Despite the county’s half-percentage decrease in year-over-year employment, other counties in the area saw more notable drops, including San Francisco and Santa Clara counties. San Diego County, another life science hub, saw a 1.4% average decrease in life science employment from 2022 to 2023. On the other hand, Alameda County saw a modest increase in year-over-year employment, as cities like Fremont and Pleasanton provide ample space and a less pricey labor market for scaling operations. After all, the $253,000 average salary of a life science worker in San Mateo County is over 40% higher than an industry employee in Alameda County. 

“Being able to draw from [the labor pool] in East Contra Costa County and being able to draw from further south of San Jose is part of the reason that happened,” said Cale Miller, executive director of Hughes Marino, a commercial real estate firm. “A lot of times, the R&D units of these companies start closer to the universities … and as soon as they've proven their technology, they end up going to those markets because there is that option of an 85,000-square-foot building that might not have existed in Menlo Park before.”

Nemits said there are bright spots in the industry’s near future, with the number of open roles ramping up, as evidenced by its recent job fair which hosted about 18 actively-hiring companies and drew more than 200 attendees.

But Miller’s take is less optimistic, and it’s not just because of a more constrained funding market. The trend to sign long-term leases, which started several years before the pandemic, is now catching up to companies. He added the life science leasing environment is similar to downtown San Francisco in 2019 — or even between 1999 to 2000 — when companies were leasing space well before they needed it and committed to longer terms than necessary.  

“Some of these venture-backed companies that might not be through their phase II or phase III [trials] aren't going to get funded through the next round because there aren’t unlimited dollars out there,” he said. “Now, if a company has a market cap of $20 million, and they were worth half a billion at some point, they may not be worth anything because they’re saddled by a $90 million lease. A company might think about acquiring their [intellectual property] … but they’d rather let them go bankrupt and figure out how to pick up the IP after.” 

Last year saw the most bankruptcy filings by biotechnology firms statewide since 2010, the report showed, and patent filings in core life science sectors dropped by almost 40% compared to 2022. 

“The layoffs are going to continue to happen, unfortunately,” Miller said. “It’s a typical natural market cycle, and it's going to be ugly before it gets better.”

alyse@smdailyjournal.com

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