Few industries have grown as rapidly or captured the imagination of economic developers to as large an extent as biotechnology. This article examines the origin of the industry, its composition today, and the factors that impact location opportunities for biotech investment.
In 1973, Herbert Boyer and three other university researchers published “Construction of Biologically Functional Bacterial Plasmids In Vitro.” The paper described a revolutionary technique for isolating individual DNA segments and inserting them into another cell with unprecedented precision. Although the molecular structure of DNA had been identified 20 years earlier, all subsequent efforts to create artificial DNA had proven futile. The technique perfected by Boyer and his colleagues, however, finally made recombinant DNA a reality.
Robert Swanson was one of the first individuals to recognize the commercial potential of recombinant DNA. Swanson, a fledgling venture capitalist, was trying to establish a company based on the promising premise of genetic manipulation when he learned of Boyer’s discovery. When Swanson visited Boyer at his laboratory, the overworked scientist agreed to speak with Swanson for just 10 minutes.
Several hours later, the two men remained deep in discussion at a bar named Churchill’s. Over beers, the two men agreed to start a company, and capitalize the new firm with $500 each. Although their new firm, Genentech, did not have a product in the marketplace for years, the world’s first biotechnology company had been conceived.
Three decades later, biotechnology has grown into a global industry with four major subsectors:
Research, testing, and medical laboratories: As biotechnology products become increasingly complex, the importance of research and testing has become a critical element of the product development cycle. Government regulations require years of testing before a biotechnology product is approved and there is a growing market for firms that specialize in such services.
Medical devices and equipment: Biotechnology is used in a variety of sophisticated medical devices and equipment due to its effectiveness at targeting specific biological processes.
Drugs and pharmaceuticals: Traditionally, medicine has been created through novel mixtures of existing chemical compounds. With the rise of biotechnology, however, many promising pharmaceuticals are created through the use of living organisms. With many of the most promising medical advances predicated on the use of biotechnology, the field is expected to play an expanded role in healthcare.
Agricultural feedstock and chemicals: Biotechnology allows scientists to create new breeds of crops. Through precise genetic changes, scientists can create plants with enhanced characteristics such as disease resistance or increased nutritional content. Biotechnology promises to also alter the potential uses of existing crops. Current biotechnology research on cellulosic ethanol may dramatically increase the efficiency of using crop-based fuels.
According to the Bureau of Labor, today more than 1.2 million people work in one of these biotechnology subsectors. Research, testing, and medical laboratories and drugs and pharmaceuticals are the two fastest growing segments of the biotechnology field. Together, these subsectors account for nearly 60% of all biotechnology employment, representing more than 700,000 workers. One in four biotechnology workers is employed in medical devices and equipment. The agricultural feedstock and chemicals subsector represents remaining biotechnology employment.
Biotechnology employees enjoy some of the highest wages in the country, in addition to positive growth prospects. The average salary for a biotechnology worker tops $66,000, exceeding the national average by 65%. Wages in the drugs and pharmaceuticals subsector are even higher, annually averaging nearly $80,000. Furthermore, according to projections by the Milken Institute, biotechnology employment will grow by 1.6% annually through 2014, with many subsectors projected to experience even faster rates of growth. During this period, overall job growth in the private sector is expected to reach 1.4% annually.
Significantly, the benefits of biotechnology extend beyond those individuals who directly work in the industry.
Biotechnology jobs are characterized by extraordinary multiplier effects. According to recently published findings by BIO, the nation’s leading biotechnology lobbying organization, each biotechnology job produces an additional 5.7 jobs in other employment sectors throughout the community.
Few industries can rival biotechnology in potential community economic benefits so biotechnology is one of the most aggressively recruited industries in the country. According to one survey, biotechnology was cited by more than 80% of local and state economic development agencies as a priority target industry. Fuelled by visions of an educated, growing, and well-paid labor force, cities and states have eagerly announced economic initiatives aimed at attracting biotechnology firms to local sites.
Unfortunately, fostering a thriving climate for biotechnology firms is one of the most difficult economic development tasks facing communities today. With nearly every community having identified biotechnology as an important target industry, the competition for biotechnology firms is fierce. Perhaps more importantly, the needs of biotechnology firms can be matched by very few cities.
Places with a proven past of biotechnology development have been remarkably successful in maintaining their dominance in most segments of the industry, especially in the areas of research, testing, and medical laboratories and medical devices and equipment. These two biotechnology fields are disproportionately clustered in a small number of cities distinguished by common characteristics—plentiful, educated labor forces, high levels of life sciences R&D expenditures, substantial venture capital markets, and large patent portfolios
Today, only a handful of cities in the world possess all of these qualities. As a result, pharmaceutical-driven biotechnology is overwhelmingly concentrated in a few choice locales. Historically, established biotechnology clusters such as San Francisco and Boston have remained virtually unchallenged over the past 20 years. North Carolina’s Research Triangle is perhaps the only newcomer among the top biotechnology regions during this period.
The following analysis of the country’s largest combined metropolitan areas reveals the importance of education, investment, and commercialization in the biotechnology field. Examined qualities include the number of science and engineering (S&E) doctoral graduates the area produces each year, the level of local research and development (R&D) expenditures, the availability of investment opportunities, and the number of patents produced. Although the individual metrics are imperfect measures of the local biotechnology environment, collectively they produce a common narrative. Cities pursuing an economic development agenda that includes biotechnology must consider the current examples of the leading metropolitan areas.
Biotechnology firms demand highly-trained workers. Research in many areas requires a graduate degree or higher. Unfortunately, America does not produce enough individuals with the adequate educational experience for successful biotechnology careers. In 2004, the latest year in which detailed statistics are available, this country produced just over 41,000 doctoral S&E graduates. More than one in four of these individuals graduated from universities located in just15 metropolitan areas.
The New York-New Jersey combined statistical area (CSA) alone accounted for more than 5% of all such graduates. An additional four MSA clusters produced another 11%of S&E doctoral graduates—Boston, San Francisco/San Jose, Washington/Baltimore, and Los Angeles. Ten other cities produce another 10% of the doctoral S&E students in this country. In one of many indications of how heavily concentrated these students are, the metropolitan area with the 15th greatest number of S&E degrees awarded, San Diego, produces more doctoral graduates than half of all U.S. states combined. Cities that wish to promote pharmaceutical and research-based biotechnology industries must increase the number of individuals adequately educated for such work. Only through the development of a “people pipeline” can cities properly respond to the needs of the biotechnology industry.
Universities are not only a vital source of labor, but they are also home to some of the most promising biotechnology research. As biotechnology development may take decades before producing a profitable and commercially viable product, university R&D is an important resource for private firms. University-sponsored biotechnology research is even more concentrated than doctoral S&E graduates. Of the more than $25 billion in life sciences R&D expenditures in 2004, more than half of every research dollar went to just 15 metropolitan areas. Significantly, four of the top five cities in S&E doctoral graduates also ranked among the top five cities for life science R&D funding. Notably, the Raleigh-Durham region replaced Boston on the list. Communities that seek biotechnology industries must simultaneously promote heavily-funded research universities.
To fully capitalize on research that occurs at universities, a viable capital environment must exist to support a commercially promising innovation. Entrepreneurship is prevalent among cutting-edge researchers. According to a report by the Kauffmann Foundation, more than one in four patenting scientists that receive funding from the National Cancer Institutes eventually launches their own biotechnology firm. With extremely long product development cycles, fledgling biotechnology firms must have access to deep, patient pocketbooks. In 2004, the five cities with the greatest level of biotechnology capital investment were the same five cities with the greatest number of S&E doctoral graduates.
The San Francisco/ San Jose region remains the undisputed leader in biotechnology equity. Last year, the area witnessed more than $4.5 billion in biotechnology investment—more than the Boston, New York, L.A., D.C./Baltimore, and Seattle regions combined. And these five cities featured more biotechnology investment than any region other than San Francisco/San Jose itself. Fewer than 10 cities in America feature funding of even a quarter of the size of Seattle’s investment market, the 15th largest on the list. Cities wishing to foster biotechnology firms will likely prove successful despite their comparative absence of private capital. Money follows minds, as this is where the tomorrow’s discoveries will be found. To lure biotechnology firms, fledging communities must first develop human capital.
The final element underlying a prosperous biotechnology industry is the commercial success of existing firms. While the vast majority of patents do not produce profitable products, they remain the most important property of biotechnology firms; financial success is invariably built upon a pyramid of patents. Unfortunately, the U.S. government no longer publishes patent data on the MSA level; the collection of such information ended in 1999. Nonetheless, statistics from 1995-1999 provide a glimpse into the important role of patents in sustaining a local biotechnology industry.
Four out the five cities with the largest patent portfolios are familiar—New York, San Francisco/San Jose, Boston, and D.C./Baltimore. Philadelphia is the only city on the list that hasn’t been highlighted earlier. Through a combination of university research and a massive pharmaceutical presence, Philadelphia has developed one of the most commercially impressive biotechnology industries. With leading pharmaceutical companies increasingly developing their own in-house venture capital networks, cities can use existing pharmaceutical firms to leverage future biotechnology development. Most communities, however, will need to promote traditional venture capital investment.
Every dominant metropolitan player in the biotechnology industry has become so through its production of knowledge. The only proven strategy of catapulting to the upper tier of biotechnology metropolitan areas is through the development of renowned research universities. The Raleigh-Durham Research Triangle, for example, is one of the leading biotechnology regions in the world, but thirty years ago, North Carolina was better known as a leader in tobacco and textiles. Thanks to a number of remarkable research universities and a long-term focus on supporting the biotechnology industry, however, North Carolina has transformed its economy to successfully compete with major biotechnology centers in the Northeast and West Coast.
Although the discovery of recombinant DNA is rightly credited to Boyer and his colleagues, their work was made possible only through the commitment of regional research institutes such as Stanford and the University of California system. And while Swanson is correctly characterized as a brilliant entrepreneur, he began his career as a science student in Boston. Cities with large, world-class research universities have become biotechnology powerhouses. As an entrepreneur and a scientist created the biotechnology industry over pints, clairvoyant communities were already following the dictates of the bar’s namesake. As Winston Churchill once proclaimed, “The empires of the future are the empires of the mind.”
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