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San Diego's third-ranked biotech industry needs to find space to grow

San Diego has the third strongest biotechnology industry in the country, trailing only the San Francisco Bay area and Boston. But to maintain its standing, it will have to find space for new manufacturing facilities, and sufficient venture capital to make the needed facilities and new drugs a reality.

Jerry Keeney, a first vice president with CB Richard Ellis' Bioscience Services Group, said the fact that San Diego is employing so many biotech workers is a lot more telling than the size of any buildings that might be built in other parts of the country.

CB Richard Ellis tracks about 12.5 million square feet of San Diego facilities with specialized labs onsite. About 1 million square feet is for Pfizer (NYSE: PFE) in La Jolla, alone.

Keeney said there is about a 9 percent vacancy in direct and sublease space in the central market of San Diego, which extends to La Jolla.

Most of the vacancies are in sublease space, but that doesn't bother Keeney. "These vacancies offer tremendous opportunities. The spaces have lower lease rates, TIs (tenant improvements) and larger concessions," he said.

Keeney said that these biotech firms probably need any concessions they can get because they are likely to be cash poor.

Keeney also said that although there will be new construction coming on line next year, there is no significant construction of laboratory space coming on line in 2004.

Once that is built, Keeney says nearly all of the land in the central county for biotech use will be gone. While there will undoubtedly be redevelopment opportunities, that may be a more difficult road.

Like Keeney, Todd Anson of Cisterra Partners, also spoke about the demand for these spaces, even though they are highly specialized.

Anson said some 14 years ago, Idec Pharmaceuticals (now Biogen Idec) paid $1,000 per-square-foot for a 70,000-square-foot pilot manufacturing facility with highly specialized laboratory space on the Torrey Pines Mesa.

Now, with new 350,000-square-foot facilities in Torrey Pines, as well as the 750,000-square-foot first phase under construction of an eventual 1.2 million-square-foot manufacturing facility in Oceanside, Idec doesn't need the pilot project. This, says Anson, opens up an opportunity.

"True this is a very specialized space, but it is also a very scarce commodity," Anson said. "There's an acute shortage of FDA approved manufacturing facilities."

The challenges to biotechnology brokers, developers and investors was discussed at a recent Urban Land Institute meeting at the University Club.

Nathan Moeder, research director of the London Group Realty Advisors and moderator of the program, said this region added about 18,000 biotechnology/life sciences jobs from 1990 through 2003, representing a 158 percent increase. What's more, this sector is expected to add another 8,000 jobs between now and 2007. But before those jobs can occur, the capital must be obtained to make the dream happen.

Eric Karpinski, a senior associate with Forward Ventures, said the big difficulty for venture capitalists is that the lead times from drug conception to actual manufacturing are enormous. He notes that it can take anywhere from 10 to 15 years and $800 million to bring a drug to market. Those kinds of numbers make investors very nervous.

"We have to syndicate and bring in other investors. That's the only way we can make this work," Karpinski said.

Karpinski, whose firm has about $450 million worth of biotechnology investments in its portfolio, said his company typically invests $8 million to $15 million per company.

While there are significant risks for investors, Karpinski said any burst in the biotech bubble wasn't nearly as bad as that experienced by technology firms.

Karpinski, whose firm was co-founded by Idec and Hybritech co-founder Dr. Ivor Roysten, said with all the research institutions located in San Diego, the biotech industry should continue to be strong.

"San Diego is a top biotech player, and I don't think anything is going to change that," Karpinski said.

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