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Biomed’s Big Role

Paglia

The county has 16 technology clusters above the national average, ranking second in the nation behind only Boston, according to the 2010 Orange County Workforce Indicators report.

There is no doubt: Orange County is a player in the technology industry.

In the past decade, the biomedical industry has emerged as one of OC’s leading technology clusters. In fact, the medical equipment and supplies manufacturing cluster has a concentration nearly three times the national average and is the county’s third most concentrated tech cluster.

Total biomedical employment in OC in 2008 was more than 30,000 people, according to the California Healthcare Institute. Statewide estimated employment in the industry in 2008 was 274,000. The average annual wage for the biomedical industry across the state in 2008 was nearly $75,000.

As an industry that creates high wage jobs for thousands of Californians, the success of the medical device industry is crucial for the state’s economy as well as that of OC.

Investing in Startups

For the medical device industry—which thrives on innovation—securing funding from investors is a critical success factor. Many groundbreaking technologies and devices originate from startups that have less than 50 employees.

More often than not, medical device companies rely on funding from venture capitalists, angel investors and other wealthy funders to conduct comprehensive research, product development, testing, regulatory review and then market delivery.

There is good news coming from private investors for the medical device industry. Preliminary results from the spring 2011 Pepperdine Private Capital Markets Project, an investigation of the major private capital markets, shows that venture capital and angel investors have increased their focus on the medical device industry.

More than 7% of venture capitalists and 10.3% of angel investors have said that the medical device industry will be their top area of investment in the next 12 months.

This infusion of funding is not an anomaly. Previous iterations of the survey have shown an increasing interest in investment in the sector.

The winter 2011 report revealed that 14.8% of angel investors and 10.1% of venture capitalists surveyed were already invested in medical devices and equipment as of September.

Geography also weighs favorably for local companies because investors report that they are focusing attention on OC and the Los Angeles area.

According to the most recent data, 10.4% of angel investors and 6.3% of venture capitalists plan to invest in the region in the next 12 months.

Also, according to previous iterations, 48% of angel investors make investments in companies that are within 30 miles of their location. With one of the nation’s largest angel investor groups, Tech Coast Angels, OC-based innovators have a significant “home field” advantage.

Despite the good news, there are challenges. While increased attention from the investment community is welcome news for medical device companies, 31% of the privately held businesses that responded to the spring 2011 survey felt that government regulations and taxes were the No. 1 emerging issue that they would face.

In order to maintain the momentum seen in the investment community, government policies should stimulate economic activity and encourage innovation.

An important first step in incentivizing innovation came in February when the Food and Drug Administration announced the Medical Device Innovation Initiative that developed a priority review for new, breakthrough medical device technology.

According to the FDA, “the initiative will seek to strengthen the nation’s research infrastructure for developing breakthrough technologies and advancing quality regulatory science.”

Priority review from the government will lure capital into the medical device field. The government’s initiative is an important way to show private investors that the medical device industry is a priority both in OC and California.

In his State of Union address, President Barack Obama stressed the importance of innovation, and this initiative is a concrete example of that.

In California, there are several industry trade groups such as the California Healthcare Institute, BayBIO and Biocom that are pushing to improve state policies that will serve as catalysts to the industry.

According to these experts, the state must focus on protecting and improving research and development credits. This will help provide companies with an incentive to innovate in California.

In addition, increasing science, technology, engineering and mathematics offerings in K-12 education and preparing a knowledgeable and skilled workforce also will incentivize medical device companies to locate and expand in the Golden State.

This hits home in OC. According to the 2010 Orange County Workforce Indicators Report without a skilled workforce “Orange County companies that need employees with math and science skills may consider leaving for other locations that provide for their desired workforce. Even if they do not leave, many may resort to recruiting workers from outside the county, while Orange County students will fail to obtain high-growth, high-paying jobs.”

Local Efforts

In February, the chairman of the county Board of Supervisors laid out goals for 2011 that included balancing the county budget without tax increases and reducing costs in county government. Reducing government cost and limiting tax increases are imperative for OC due to its high cost of living.

If the county government continues to focus on limiting costs to businesses and residents, OC is poised to grow its innovation corridor from the bottom up.

Local elected officials must take the next step and advocate for policies on the state and federal level that well help spur innovation from the top down.

In the digital age it has become increasingly easy to innovate outside the traditional startup locations. In order for OC to remain competitive, we must couple strong federal policies with equally strong state and local policies that give the county the very best footing.

OC has the opportunity to capitalize on its current success but the stars must align with policymakers incentivizing not prohibiting innovation.

Strong, supportive policies will create certainty that will allow the investment community to sustain and increase its interest in the industry and top-notch companies delivering medical device innovations of tomorrow.

Paglia is an associate professor of finance and senior researcher for Pepperdine Private Capital Markets Project.

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