California Life Sciences Sector Faces Challenges Despite Growth

California's life sciences sector continues to lead the nation in employment, NIH funding, and venture capital investment, according to a new report from California Life Sciences (CLS). However, the industry faces significant challenges that could impact its future growth and competitiveness.

Employment Growth Slows Amid Economic Pressures

Life sciences employment in California grew by 2.6% in 2024, reaching approximately 345,000 jobs. This growth rate, while still positive, represents a slowdown compared to previous years. The sector saw 3.4% growth in 2023 and 4.8% in 2022.

Mike Guerra, President and CEO of CLS, expressed concern about this trend: "I think the real problem is that you do see the pattern of even though there was growth, it was the slowdown of growth, and I think we're going to see that even more."

Several factors contribute to this deceleration, including:

• High cost of living in California
• Competition from other states and countries for talent
• Potential cuts to National Institutes of Health (NIH) funding

NIH Funding and Venture Capital: A Tale of Two Trends

NIH Funding Increases, But Future Cuts Loom

California secured $5.2 billion in NIH funding for fiscal year 2024, maintaining its position as the top recipient state. This represents a 2% increase from the previous year, matching the growth rate of 2023 but falling short of the 4.2% growth seen in 2022.

The Bay Area received the largest share of this funding, with $2.1 billion allocated to institutions such as UC San Francisco and Stanford University. However, Guerra warns of potential cuts on the horizon: "We do anticipate that to drop for 2025 and beyond, which is just a huge concern for us and would be devastating, really, to our industry."

These concerns are not unfounded. The Trump administration has already implemented cuts to many NIH research programs, and reports suggest that the agency's fiscal year 2026 budget could be slashed by approximately 40%.

The impact of such cuts could be severe, given that NIH funding has been associated with 99.4% of FDA-approved drugs between 2010 and 2019, according to a cross-sectional study.

Venture Capital Rebounds Strongly

In contrast to the uncertain future of NIH funding, venture capital investment in California's life sciences sector saw a significant rebound in 2024. VC deals increased by 31.3%, a marked improvement from the 5.6% decline in 2023 and surpassing the 10.3% growth in 2022.

Guerra attributes this turnaround to renewed investor confidence and the closure of deals that had been delayed from the previous year. The Bay Area was particularly successful in attracting VC funding, securing $12.5 billion to fuel new startups, technologies, and treatments.

Policy Challenges and Industry Resilience

The life sciences sector in California faces several policy-related challenges that could impact its future growth and competitiveness:

1. Changes to state tax credits: SB 167, signed into law in June 2024, limits the use of tax credits, including those for research and development (R&D), to $5 million for tax years 2024 through 2026.

2. Federal R&D tax credit changes: Companies are now required to spread out domestic R&D expenses over five years and foreign expenses over 15 years, rather than deducting them in the year they were incurred.

3. Competition from other states: Guerra notes that other states often offer better business incentives, particularly for startups, which can make it challenging for California to retain companies.

Despite these challenges, Guerra remains cautiously optimistic about the sector's resilience: "A strong talent pipeline and access to capital are critical for turning discoveries into real-world solutions, and it's what California is really known for. The continued growth really depends on investing in the full ecosystem, from education all the way through commercialization in the grand scheme of things."

As California's life sciences sector navigates these complex economic and policy landscapes, its ability to maintain its leadership position will depend on strategic investments, policy reforms, and continued innovation in the face of mounting challenges.