Florida Overpays For San Diego's Cluster Outfits

Will San Diego's vaunted industrial clusters bomb out? Hardly. But one biotech center, Scripps Research Institute, is already setting up a branch in Florida, and another, Burnham Institute for Medical Research, is expected to announce a similar operation this month. These deals represent growth that won't take place here. Little by little, Florida is paying big bucks to pilfer our clusters.

Meanwhile, we're not helping ourselves. Telecom superstar Qualcomm threatens to stop any expansion in Sorrento Valley, and perhaps move out altogether, if the City goes ahead with its wacky plans to put a commercial airport at Miramar. Other techs and telecoms located in the same area may well echo Qualcomm's warning. (Happily, San Diegans seem to realize the Miramar push is an attempt by real estate developers to snatch choice Lindbergh property; it's not likely to succeed.)

The concept of cluster was always part bluster -- a gimmick of the giddy 1990s. The idea was that a group of related companies producing products for export could mushroom and, through the ripple effect, give birth to service providers, vendors, and spin-offs of related companies. Institutions such as Scripps, Burnham, and the University of California, San Diego, would provide cerebral input. Of course, this was already happening; a new ribbon was simply put around an existing phenomenon.

The clusters were biotech, telecom, software, computers and electronics, space and defense, financial services, tourism, entertainment, business services, recreational goods (largely golf), environmental technology, horticulture, and fruits and vegetables. The emphasis was to be on the first six -- supposedly industries for the new millennium. Biotech and telecom were to produce the high-paying jobs to offset the low-paying jobs in tourism and entertainment.

The industry clusters have slipped a bit, but not as much as they have elsewhere in the post-2000 tech crash. Telecom, which imploded in many locations when the dot-com bubble burst, has receded only slightly here, largely because Qualcomm has such a good niche in the industry, and San Diego had not gone gaga over dot-coms. Golf equipment has been a disappointment; the baby boomers expected to flood to the links in their retirement find the game too taxing for their attention spans. Software produced San Diego's largest insider-selling scam, Peregrine Systems, and other public software companies have had problems.

Biotech has been a bonanza for venture capitalists and insiders who take companies public and pile up huge profits dumping stock that they got for 1 cent a share to a gullible public for $50. But in the industry's 30-year history, very few San Diego biotechs have come up with viable medical products. Buyer beware. Last year, the region's 37 public biotech companies lost a collective $718 million, the second-worst profit performance in the United States, says accounting firm Ernst and Young.

As the accompanying chart shows, the most-touted tech clusters provide a very small and declining percentage of San Diego jobs. However, the pay is high in tech.

San Diego's cluster industries are suffering from a malady that was predicted five years ago. Harvard Business School professor Michael Porter said in 2001 that the clusters were doing well but San Diego had to address the disparity between average wages and the cost of living. He noted that San Diego's wages were "comparable to the national average," but the cost of living was 23 percent higher. Would cluster companies expand? With such high living costs, particularly for housing, would companies relocate here?

San Diego family income remains moderately above the U.S. average (about 10 to 15 percent), but the cost of living is now a whopping 50 percent higher, according to the most recent report by the American Chamber of Commerce Research Association. San Diegans' income/outgo squeeze is worse. The bursting of the housing bubble may bring some price relief, but it will also engender a rash of families in trouble with their risky mortgages. Housing deflation will dent retail activity because people have been borrowing against the bloated equity in their homes to keep consuming.

The city government is dysfunctional, and taxes will have to go up unless city workers' outsized pension benefits can be brought down. Without higher taxes or benefit cuts, the infrastructure will continue to decay. The dilemma is not conducive to attracting or retaining cluster businesses.

Although officials at Scripps and Burnham aren't saying so, such factors must have weighed on their decisions to locate branches in low-cost Florida. It's a beggar's game: see how much in subsidies you can get from state and local governments.

Scripps set the tin-cup standards beginning in 2003. It got the state and Palm Beach County to ante up $569 million. Scripps said it could produce 545 jobs in seven years, so the cost would be $1 million a job. Skeptics said there were other expenses -- debt service, roads, utilities, miscellaneous infrastructure -- that could bring the subsidy close to $1 billion, or $2 million a job. Realists and environmentalists put up a fight, but Scripps got its way. Scripps has 170 scientists working in a temporary facility, but the project is now behind schedule.

Burnham appears to be choosing among three locations -- Orlando, which lost out in the bidding war for Scripps; Port St. Lucie, which is 35 miles from Scripps; and Naples, which is a long shot. Burnham can possibly receive $245 million in state funds and about $90 million from local governments, for a total of more than $330 million. The target: 310 jobs in seven to ten years, according to Florida media. Once again, the price would be more than $1 million per job at the least; there could be additional large costs, as there will be with Scripps.

Florida media know this is costly but point to factors such as spin-offs. Technologies will come along, and new companies will be formed to make and merchandise promising new drugs, Floridians are told. One study indicated that the new Burnham facility could generate 3600 spin-off jobs in 15 years.

Balderdash. San Diego, the nation's biotech hub, is proof that spin-offs don't create many jobs.

On its website, Burnham boasts these accomplishments by its scientists: (1) the laboratory technique that forms the basis for the PSA (prostate-specific antigen) test for prostate cancer, (2) the enabling technology for the cancer drug Epogen, and (3) one of the first vitamin-based drugs for cancer, Targretin.

Nancy J. Beddingfield, director of institute relations for Burnham, says that Epogen, controlled by Thousand Oaks biotech Amgen, provides no royalty stream to Burnham.

Targretin throws off a modest royalty. It is controlled by a San Diego biotech, Ligand Pharmaceuticals, which is truly a Burnham spin-off. Ligand has two Targretin products that serve small niche markets. The company has lost money for 11 straight years, and last year was its worst. Its cumulative deficit is $973.3 million. It has restated its earnings for 2002, 2003, and most of 2004 and just announced it will pay $12.2 million to settle related lawsuits. The Securities and Exchange Commission is investigating the earnings problems. Ligand admits it has faulty internal financial controls. Last week, David Robinson, chief executive since 1991, resigned under pressure from unhappy institutional shareholders.

Another Burnham spin-off was Telios Pharmaceuticals, which went into bankruptcy in the middle 1990s and was later purchased. A third spin-off is NeuroMolecular Pharmaceuticals, which is privately held and based in Emeryville.

In filching our clusters, Florida will suffer expensive disappointments.

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