More than $1 billion 'ventured' into San Diego companies in 2006

By: BRADLEY J. FIKES - Staff Writer | Saturday, January 6, 2007 6:37 PM PST ∞

After a roller coaster ride during the last decade, venture capital funding has stabilized in San Diego County. A total of $1.06 billion was invested in 2006, just a shade higher than the previous year's, and the highest since 2004.

In the peak year of 2000, more than $2 billion in venture capital poured into the area. But investment, both locally and nationally, swiftly declined after the tech boom peaked. Now those wild swings have leveled off.

And the biggest chunk of that money is going to life sciences ---- biotechnology and medical-device companies, a trend that goes back more than a decade. The rest is split among high-tech fields such as telecommunications, software and information technology.

Nearly half of the $10.7 billion flowing to San Diego County companies from 1995 to 2005 went to biotechnology and medical-device companies, said Michael Schuerman, director of research for the San Diego Regional Economic Development Corp.

"That really speaks to San Diego's status as a biotech Mecca," Schuerman said.

By geography, areas at or near the coast got the most investments in 2006. The 92121 ZIP code of Sorrento Valley attracted the largest number of investments, 53 of 138. That region, just east of La Jolla, is also where the largest concentration of biotech and other life sciences companies have been located, along with other technology companies.

Carlsbad led the way in North County, with 18 investments reported. In second place, 11 investments were reported in the 92130 ZIP code of Carmel Valley. In the rest of North County, investments totaled three in Poway, three in Solana Beach, two in Cardiff and one each in Del Mar and San Marcos. (In some cases, companies received more than one investment over the year.)

Big numbers

Life sciences got the biggest single investments in 2006, led by $100 million into Kalypsis, a Sorrento Valley pharmaceutical company trying to solve one of the industry's biggest problems: the enormous cost and time it takes to find and develop a new drug. The runner-up, with $60 million, is Zogenix (Carmel Valley), a developer of drugs to treat central nervous system disorders and pain. Third and fourth, with $53.8 million and $52 million, were Cadence Pharmaceuticals (Carmel Valley) and Ambrx (La Jolla).

Of all four, only Ambrx might be considered in biotech, strictly speaking. Biotech companies employ living creatures or life processes to make products. Ambrx uses genetic engineering and a technique called "directed evolution" to make improved protein drugs. More frequently today, small pharmaceutical companies such as Zogenix and Cadence buy rights to existing drugs that larger pharmaceutical companies don't want to develop.

The numbers were reported in the MoneyTree survey by the National Venture Capital Association and PricewaterhouseCoopers and from SoCal Tech, a venture tracking service. Some investments made were not counted because they were for undisclosed amounts.

Especially impressive is the small area into which these billions flowed, Schuerman said. San Diego County is one of the smallest investment areas separately tracked, both in population and geography. Over the last decade, the county got about three-fourths the amount of money as did the area named "LA/Orange County." That area is much bigger than its name implies, Schuerman pointed out ---- it includes the Central Coast and San Joaquin Valley.

Rewarding investments

Life science investments are attractive because they can get a higher rate of return than nonmedical areas, said Duane Roth, executive director of Connect, a technology entrepreneurship program. Roth is former chairman of Biocom, a life science trade group based in San Diego.

The drawback to life science as an investment is that drugs and medical devices require relatively large sums of money and long periods of testing before they are approved for sale. The U.S. Food and Drug Administration has the power to approve these products, and requires that they be shown to be safe and effective.

"But if you get through that, the margins are higher and there's less competition," Roth said.

"The demographics also favor this. Life expectancy is on the rise all over the world, and as people live longer, they're going to need more medical care. In the macroeconomic picture, world spending on health will go up."

Roth said biotech and other life science companies are paying increased attention to documenting the economic benefits from their products.

"The drug Avastin from Genentech can justify an extraordinary price because it not only saves lives, but puts people back to work," Roth said. "You can take this value back to society or the (insurance) payer and say this drug is worth X, and we have the data to prove it."

Moving in

San Diego County has also attracted more venture capital firms in the last few years, especially those with a life science focus.

In November, EDF Ventures of Ann Arbor, Mich., (http://www.edfvc.com/) officially opened an office in Carlsbad. The company has $170 million in investment funds under management.

Beau Laskey, general partner in charge of EDF Ventures, said the location was chosen to tap into the pool of young companies and research teams in Southern California. EDF is investing in health care and information technology companies.

In February, Domain Associates, a life science venture firm, moved its West Coast office from Orange County to Carmel Valley. The firm has $1.4 billion under management.

And in 2004, biotechnology giant Amgen opened a $100 million fund in San Diego, Amgen Ventures.

The arrival of firms from out of town over the last decade, in addition to firms founded in San Diego, such as nine-year-old Mission Ventures, with $500 million under management, makes it easier for new life science companies to reach investors. Venture firms like to keep an eye on the companies they invest in, for example, by placing a partner on a company's board of directors. That task is easier when the company is nearby, so the firms generally cluster around areas where they think investments are likely.

Contact staff writer Bradley J. Fikes at (760) 739-6641 or bfikes@nctimes.com.

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