How the Recession Fueled San Diego Biotech Innovation - Voice of San Diego

Economy UNVEILING THE UNSEEN

How the Recession Fueled San Diego Biotech Innovation

During the downturn, jobs remained steady in San Diego’s life science industry. The reason why lies with people like Sridhar Prasad, who became his own boss after being laid off.

Squaring his shoulders, Sridhar Prasad began to make his pitch in front of a crowd of 130 biotech professionals. He had 30 seconds to make a big impression to potential collaborators about his small startup company.

In a soft voice, he explained how he uses new methods to search for potential medicines and hoped his mild-mannered pitch would convince the scientists and biotech executives in the audience to use his screening services.

He finished with seconds to spare.

A stagnant economy often squashes dreams of new businesses, but the experiences of local entrepreneurs like Prasad reveal how the reverse can be true in the biotech world. Even as the economy tanked, overall employment in San Diego’s biotech industry increased slightly. The number of startup companies swelled.

Last year, 300 new biotechs launched, up 13 percent from 2008, according to a recent report from Connect, a biotech advocacy group.

Prasad, who holds doctorates in biomolecular crystallography and biophysics, fits the pattern: He became his own boss because he lost his job. After he was laid off from a diabetes research company in January 2009, he started the customary job search.

But then he had a realization.

“I saw all my peers and colleagues who had started something on their own, and thought, ‘If they’re able to do it, I don’t see any reason why I can’t do it,'” Prasad said. “I decided I should follow my idea, and not give it up.”

He started writing grants and in August his new drug screening company, CalAsia Pharmaceuticals, was born. The firm’s three employees work with larger companies and academic institutes to scan through molecules and determine which can be turned into drugs.

The bad economy fuels creativity by giving people time and motivation to try out ideas they might otherwise store on their mental shelves, while also freeing up more people to contribute to these startup efforts.

“Downsizing creates a pool of people who have management expertise as well as technical expertise that can band together to form a company,” said Steve Hoey, the senior program manager at Connect.

This was true at Phytotox, a local biotech that aims to create a Botox-like anti-wrinkle treatment. When Nelson Scharadin, a former Wall Street investment banker, came to San Diego to try his hand at biotech after the market crashed in 2008, the company took advantage of his financial experience and brought him on as the chief financial officer.

“I came out here to essentially start over,” Scharadin said.

But the same economy that created this surge in new companies also makes it harder for them to secure funding. Investors are more hesitant to spend, while endowments at nonprofits are shrinking and competition for federal funding is growing steeper.

Venture capital investments in San Diego companies dropped from $1.9 billion in 2007 to $900 million last year, according to a recent report by PricewaterhouseCoopers and the California Healthcare Institute. And when they do invest, many venture firms and individual investors are steering their money toward companies with more developed products, leaving startups to fend for themselves.

“Getting outside investment has always been a challenge, but it’s particularly difficult in the current investment market because there’s less available capital, so everyone is becoming more risk averse,” Hoey said.

Prasad knew about these investment odds, but decided his expertise would help him defy them. He applied for government and nonprofit grants to hold his company over while he collects the data he needs to attract other investors.

Many new entrepreneurs rely on this approach, turning to the federal government, family and friends, and their own bank accounts for funds. Although the anti-wrinkle cream company Phytotox has secured about $7 million from investors, Scharadin has still been forced to use some of his own money to fund it.

Prasad used severance pay and a small contract from a Palo Alto biotech to fund his company until February, then went three months without funding until his first federal grant came through. Federal grants like Prasad’s are playing a greater role funding biotechs here, increasing from $889 million in 2008 to $1.2 billion last year, according to Connect.

Prasad recently landed a $1 million grant from a nonprofit that will help him expand his company. But many nonprofit foundations have seen their endowments shrink, which means fewer research funding opportunities.

For example, The San Diego Foundation’s Science and Technology Working Group had to cut the number of grants it gives for innovative life science and technology proposals from its usual eight or nine to five this year, said Jerry Hoffmeister, who reviews proposals for the group. The grants, typically between $50,000 and $75,000, are often given to young scientists and engineers to help pay salaries and materials before they can land larger federal funding.

There’s another challenge for new biotechs: space and equipment. Unlike software companies that can be born in an entrepreneur’s garage, many startup biotechs require lab space, equipment and materials. To meet these needs, some entrepreneurs piggyback onto larger companies. Prasad’s company, for example, leases space and equipment from Orphagen Pharmaceuticals, a larger biotech.

Prasad hopes his company will land grants and develop enough gravitas to reach out to investors later this year. His ultimate goal is to turn his company into such a success that a larger pharmaceutical or biotech will eventually snap it up.

“There have been many ups and downs, waves of uncertainties at times,” Prasad said. “But I’ve always had confidence at the back of my mind that I should not give this up, I should not look for a job, that it will happen.”

Please contact Claire Trageser directly at claire.trageser@gmail.com.

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