SoCal’s MedTech Forecast Remains Uncertain

Author: 
Jamie Hartford
Southern California is home to established medical device manufacturers and a strong support network, but some companies are considering lower-cost locations

Southern California may be best known for sunshine, palm trees, and movie stars, but the region is also home to one of the most thriving medtech hubs in the United States. The success of several key medical device manufacturers with strong roots in the region has fostered growth of the local industry over the years. Subsequently, a strong support system of suppliers, academic institutions, and investors has cropped up, further securing the area’s status as a leading medtech cluster.

But doing business in sunny Southern California doesn’t come cheap. And as cost pressures continue to bear down on the industry, some medical device OEMs and contract manufacturers are beginning to look outside the region for lower-cost production sites. As a result, the landscape of one of the most-prominent medical device clusters could be headed for change.

In the Beginning
The medical device industry’s deep roots in Southern California began in the 1950s, when drug and device maker Allergan (Irvine) and Edwards Lifesciences (Irvine) were founded in Orange County. By the 1970s, several other medical device companies, including IVAC and IMED, which evolved into CareFusion, had also set up shop in the area.

“Everybody wanted to be in California,” recalls Frank Pokrop, director of regulatory affairs at CareFusion (Yorba Linda). Excitement over those early companies and an abundance of engineering talent from such local schools as the University of California, Los Angeles (UCLA) and the University of Southern California (USC), he notes, were sparks that helped the medtech industry to catch fire.

Further bolstering the growth of the medtech sector was the slowing of the aerospace industry, which had a significant local presence from the 1950s to the 1970s. “As it started to wind down, people started to move into other industries,” notes Bill Nissim, director of business development and marketing at Bal Seal Engineering (Foothill Ranch), a maker of coil springs used in such medical devices as pacemakers that got its own start in the aerospace market. “A lot of the aeronautical engineers and machinists I’ve met are now in the medical industry.”

Building on this solid foundation, the region now boasts a prosperous biomedical industry that includes the medical device and diagnostic sectors. The industry employs nearly 100,000 people in three main clusters in Los Angeles, Orange, and San Diego counties, according to a recent report on California’s biomedical industry from PricewaterhouseCoopers (PwC), BayBio, and the California Health Institute. Los Angeles County has attracted large medtech companies such as Johnson & Johnson’s Biosense Webster and Medtronic, while device companies focusing on cardiology, interventional neurology, orthopedics, and ophthalmology have gravitated to Orange County. San Diego, on the other hand, has a strong biotech contingent and is emerging in the wireless space. Telecom giant Qualcomm (San Diego), for example, has launched its Qualcomm Life subsidiary, focusing on connected health products, and established a venture arm to support wireless health companies.

In 2011, San Diego County saw more than 1000 new industry jobs, while Orange County added more than 3000. While Los Angeles County lost biomedical jobs, Riverside and San Bernardino counties picked up the slack, adding more than 3500 jobs.

Support System
As Southern California’s medtech industry has grown, an ecosystem has formed to support it, says Matthew Jenusaitis, president and CEO of OCTANe (Aliso Viejo). Founded in 2002 to help boost technology growth in Orange County, the organization supports medical device companies through a startup accelerator, jobs page, educational programs, and networking events such as its annual Medical Device & Investor Forum. Other trade organizations include the Southern California Biomedical Council, BIOCOM, DeviceAlliance, and the Wireless-Life Sciences Alliance.

Supporting businesses that provide legal, accounting, and marketing services to the industry have also moved in. Knobbe Martens, a law firm specializing in intellectual property, has a large practice in Southern California, as does K&L Gates, a law firm that caters to the medical device industry. PwC, Ernst & Young, and KPMG—accounting firms with life sciences practices—also have a local presence.

Suppliers, too, have set up shop. In addition to Bal Seal, the region is home to a bevy of contract manufacturers that cater to the medical device market, including Aubrey Group, Providence Enterprise, Invetech, and Interface Catheter Solutions.

While the region’s universities played a major role in establishing Southern California’s medtech industry, they’re also key to its ongoing success. In 1997, San Diego State University debuted its Center for Bio/Pharmaceutical and Biodevice Development to provide continuing education for scientists already working in the industry. USC followed suit in 1999 with its Medical Device Development Facility, which focuses on neural engineering.

“You’ve got a lot of very strong fundamental programs in terms of engineering and materials science, but they’ve also evolved to offer certificate programs in regulatory affairs, clinical trials, medical device project management, and things to support the different product areas,” Pokrop remarks. UCLA, for instance, offers a certificate in medical marketing through its Anderson School of Management, and the University of California, Irvine Extension offers a certificate in clinical trials for medical device and drug development.

Southern California is also home to a number of research hospitals, including UCLA’s Ronald Reagan Medical Center, Keck Hospital of USC, and Scripps Health, a nonprofit health system that treats 500,000 patients each year. “Companies can have associations with good doctors and good clinics and form partnerships for testing and developing technologies,” Pokrop adds.

Prime Location
A stone’s throw away from the San Francisco Bay Area’s huge medical device hub, Southern California’s medtech industry benefits from its prime location. Hosting one of the world’s busiest airports, Los Angeles is a nonstop flight away from markets and investors everywhere, including Asia.

But it’s not necessary to jump on a plane to find funding. Southern California is home to cities with some of the highest per capita income in the United States. “One nice thing about Southern California is there are a lot of wealthy individuals here,” Jenusaitis says. Since OCTANe’s founding in 2002, the organization has connected 120 companies with more than $217 million in investments and equity exits. The area has also attracted such groups as Tech Coast Angels, which claims to be the largest angel investment network in the United States.

Southern California is also close to Mexico, which can benefit companies that manufacture labor-intensive products. “You can get cheaper labor, more abundance of labor, and the ability to move raw material in and out of Mexico,” Pokrop says. “Then, you can have it processed and packaged around the world.”

But there are other benefits to being close to the border, Jenusaitis says. “Low-cost manufacturing is a secondary impact. It helps; clearly there are some advantages to being close to Mexico. But in general, I think all areas of the country are able to take advantage of that.” Some companies, he adds, benefit by outsourcing clinical trials there. “A lot of ophthalmic clinical work is going on in Mexico. It provides a ton of value for Mexico as well as for medical device companies in Southern California.”

Can It Continue?
It’s not all sunshine in Southern California, however. The region is a notoriously expensive place to live and do business. California has the third-worst business tax climate in the country, according to the nonpartisan tax research group Tax Foundation. Moreover, the Los Angeles-Long Beach area, Orange County, and San Diego ranks second, third, and sixth, respectively, among the most-expensive places to manufacture medical devices.

This situation is leading some companies, such as ResMed (San Diego), a manufacturer of devices to treat sleep apnea, to consider other locations. “California is becoming more and more of a business unfriendly state,” remarks David Pendarvis, the company’s chief administrative officer. “Taxes are very high, real estate is very expensive, and pay rates are very high.” Southern California’s high cost of living, he adds, can also make it difficult to attract employees from other parts of the country.

And as if FDA regulations aren’t challenging enough, California companies must also clear regulatory hurdles at the state level. “Over the last 5 to 10 years, there’s been this creep of laws—environmental issues, Proposition 65 labeling issues,” Pokrop says. “That all seems to be unique to California.”

As a result, a company such as Bal Seal has diversified beyond Southern California, opening a new facility in Colorado Springs, CO, in November 2011. “I know from talking with the economic development council that they are attracting a medical cluster in Colorado Springs with economic zones, and they have, obviously, lower tax rates,” Nissim notes.

As cost pressures increase and the medical device tax goes into effect, more companies might consider leaving Southern California. “I’m surprised that more people haven’t done it already,” Pokrop says. “Everybody loves the region because of the weather and because there’s so much to do. But it’s expensive, and that’s going to be a growing concern.” However, while R&D outsourcing will grow, some companies will likely retain their SoCal headquarters, helping to ensure that the area remains a medtech hub. “I think certain companies will never leave,” Pokrop adds.