Should You Stay in California or Should You Go?

Author: 
Chris Newmarker and Brian Buntz

The Golden State leads the nation when it comes to medtech employment, but the costs of doing business are high.

state infographic

California is home to more medical device companies than any other U.S. state, with a dense network of high-tech firms and a talented workforce. The state’s fabled weather, the power of Silicon Valley, and prestigious universities play a role in attracting technology experts and creative professionals.  But the Golden State is among the worst in the nation when it comes to business costs and regulatory red tape, and some medtech firms are moving to less expensive destinations like Texas and Florida.

It was a small sample size—roughly 40—but a recent Qmed/MPMN reader survey found respondents pretty much split over whether medtech companies should stay or leave California.

“Quoting the once famous opening of the ‘70s show The Beverly Hillbillies, California is the ‘place you ought to be.’ Only I would add ‘if money is no object.’ Otherwise, I’d opt for a more affordable location,” Don Webber, chief operating officer of ICU monitoring platform maker OptiScan Biomedical Corp. (Hayward, CA), said in response to a recent MPMN survey on the subject.

California made news recently when Silicon Valley–based automotive firm Tesla announced it would build the world’s largest battery plant in Nevada. That state is mulling giving the company $1.2 billion in incentives to incentivize Tesla to invest in the Reno area. The “gigafactory” Tesla plans to build there could generate $100 billion worth of “economic impact over 20 years,” according to the Reno Gazette Journal.

A Case Study

RxFiber LLC, a maker of medical-grade fiber located in Northern California near Santa Rosa, CA, took notice of the Tesla news, and began reflecting on its own situation.

“We have found great employees and consultants in our area, which has been a pro to staying in our area. However, the cost of employing workers is higher than other states,” says Brenda Gilchrist, vice president of operations at RxFiber. When it comes to expansion plans, the company is now considering options outside the state.

RxFiber’s current facility is near capacity and the firm is planning on expanding for the future. While living in Sonoma County certainly has its appeal, the company is weighing the pros and cons of continuing to operate its business in California.

“For RxFiber, a growing manufacturing company that supports the medical device industry, we are interested in locating in an area where we can access quality talent, while having a local infrastructure that will support our growing needs,” Gilchrist says.

A Challenging Business Climate

It is telling that in roundups of the best U.S. states to do business, the Golden State usually scores near the bottom. Chief Executive magazine, for instance, pegged the company as the worst state in the nation for business. “California is getting worse, if that is even possible,” explained an unnamed CEO quoted in the magazine.

Meanwhile, Forbes in its latest edition of “The Best States for Business and Careers” pegged California in 37th place, with the state especially hurt by a 46th place ranking for business costs and a 43rd place ranking for regulatory environment. (Regulations especially matter for California medtech companies because the California Department of Public Health has its own licensing and safety program for medical device manufacturers.)

Pros and Cons

California is the seventh state that Webber, the OptiScan COO quoted earlier, has worked in over his career. He suspects the cost of doing business inhibits companies from manufacturing in the state, and that likewise reduces the number of “people who truly know what it takes to build and sustain a product once its been released.”

“[California] has a large pool of incredibly creative scientists and designers. It’s also a great service provider. However, as economic conditions are today, it will never be a manufacturing hub,” Webber says.

Nevertheless, California’s medical device industry remains the largest in the United States. An anonymous survey respondent pointed out many advantages especially when it comes to logistics: “Raw materials are quickly accessible, as well as shipping finished goods offshore. ... California has a wealth of tech centers that provide the latest innovative electrical and mechanical engineering needs as well as skilled craftsmen.”

Some participants in our survey defended the state as a manufacturing destination while acknowledging its downsides.

Some companies are working to keep research and development operations in California, where considerable innovation occurs, but to have manufacturing located elsewhere.  It is a strategy that arguably relies on successful design transfer.

“When should you stay? When the option is leaving for Minneapolis, Kalamazoo, or Warsaw,” says an R&D engineer in our survey who declined to be named. “That’s a snarky answer from a California native, but in all seriousness, consider polling California-based medical device teams on their willingness to relocate to any other major medical device hub. I suspect the move would come at a cost of replacing the majority of one’s personnel. Austin is arguably the wildcard in this discussion, as Texas is a more business-friendly state, a city with a more diverse culture, and isn’t a frozen wasteland in the winter,” he quips.

Whether it is worth it for a medtech company to be headquartered in California depends on the type of firm. “The answer is: ‘it depends,’” says Alan Brewer, professor of practice in the department of biomedical engineering at Texas A&M University.  “Sorry for the hedge, but the reality on this question is complex.” Brewer points to the importance of California’s traditionally strong funding infrastructure for startups and the dense network of subcontractor firms in the state.

California survey

“The VCs sitting on a company’s board of directors prefer to have their portfolio companies located relatively close by; or at least located in another medtech hub with other portfolio entities,” Brewer says. “California consistently leads the dollar accounting for new investments in our sector. Similarly, although a lesser issue, is that the multiplicity and competition between qualified, proximate subcontractors helps companies to meet their project schedule projections.” The intravascular ultrasound firm Volcano Corp. (San Diego, CA) was originally started in Texas, and moved to California for reasons like these, he says.

Many survey respondents noted that the states with the lowest business costs often don’t have enough scientifically educated people to populate a medical device company. Manufacturing is possible, but design and development people will not stay for long if quality of life is not high.

In theory, taxes and costs help fund quality of life, which can attract and retain the creative professionals who are the foundation of any successful technology driven business.

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Refresh your medical device industry knowledge at MD&M West, in Anaheim, CA, February 10-12, 2015.

Brian Buntz is the editor-in-chief of MPMN and Qmed. Follow him on Twitter at @brian_buntzChris Newmarker is senior editor of MPMN and Qmed. Follow him on Twitter at @newmarker

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