Among the many associations that come to mind when you mention New Jersey, one of the more favorable is that of pharmaceutical capital of the nation. Michigan has its automobiles, Texas its oil, and California its technology. And for some time, New Jersey has been regarded by many as the “Nation’s Medicine Chest” or even more boldly the “Pharma Capital of the World.”

But New Jersey’s dominance in the pharmaceutical realm has been slipping, and recent events suggest that its dominance has now moved from a slow demise to an accelerated demise stage unless some actions are taken. The title contender, or perhaps new heavyweight champion of pharma, appears to be California. hrow a highly innovative Massachusetts and its robust research corridor into the mix, and the picture looks even bleaker for New Jersey.

Why the poor diagnosis for New Jersey pharma?

It’s worth noting that this decline is not something new. As Ted Sherman reports in the NJ Star Ledger, one in five pharmaceutical jobs used to be in the Garden State. That ratio is now in one in seven. Sherman reports that “California now has a bigger share of the nation’s pharmaceutical jobs, with New Jersey dropping from 20.3 percent in 1990 to about 14 percent today.” The Garden State has been trimming pharma jobs for some time.

The problems for NJ’s pharmaceutical sector have emerged from some fairly fundamental issues and challenges to big pharma’s traditional blockbuster drug model along with numerous other issues that have compounded the industry’s troubles. As these companies have struggled with their new reality and tried to figure out their new business model (a work in progress), they’ve relied on cost-cutting, e.g., moving manufacturing and R&D to low-cost areas, and productivity/efficiency gains (cutting workforce) to maintain profitability and respectable earnings.

So why have things really gone from bad to worse for New Jersey pharma?

The last 10 weeks have seen a series of large megadeals which will accelerate the decline in NJ pharma. What these deals mean are more workforce reductions within New Jersey.

Merck and Schering-Plough announced a merger, and they plan to eliminate 16,000 jobs. NY-based Pfizer’s purchase of Wyeth is also coming with a series of job cuts. These deals were mostly NJ-centric. Then there is Roche’s deal to purchase San Francisco-based Genentech. Again, the job cuts are significant, but in this case, the new duo has already stated that “Roche’s pharma commercial operations in the U.S. will be moved from Nutley, New Jersey, to Genentech’s site in South San Francisco.” Not good.

So now megamergers are taking jobs from NJ to California.

But isn’t the share of pharmaceutical jobs in a state really the wrong metric to follow?

While the metric is interesting and indicative of shifts that may be happening, it doesn’t mean much if back-office (accounting, finance, HR, etc.) jobs remain in a state and therefore keep the ratio high. The real measure of the vitality of pharma in the state is whether the innovation is happening there, e.g., Are the next great pharmaceutical or biotech developments emerging from within the state?

And looking at New Jersey through the lens of upcoming upstart innovations, the picture is bleak. As we scan the ChubbyBrain database for biopharmaceutical start-ups, we see that there over 1,000. It is telling to see where the new biopharmaceutical innovations are coming from — over 18 percent of these upstarts are in California, 9 percent are in Massachusetts, and only 3 percent are in New Jersey. This is another troubling factor for NJ — the pipeline of the next big biopharmaceutical developments is nowhere close to the NJ Turnpike. Please note that if we were to include medical devices & equipment start-ups in these figures, the NJ percentage of the total goes down further.

What about investing in the next wave of biopharmaceutical innovations?

The picture isn’t pretty when looking at where the investment comes from. The lack of investment infrastructure, e.g., venture capitalists, angel investment, and corporate venture groups in New Jersey who focus on the health care arena, also underscores the issues New Jersey will have in developing its biopharmaceutical pipeline. With the exception of a few notable investors like Edison Venture Partners, Care Capital, and Jumpstart NJ Angel Network, NJ’s health care investor footprint is minuscule.

Conversely, Massachusetts has almost four times as many investors who invest in the health care arena, including two of our recently named top 10 VC portfolios, i.e., Bain Capital Ventures and MPM Capital. And, of course, California’s investor footprint for biopharmaceutical start-ups is large, with numerous angel investor and venture capital groups there to help those with credible ideas in the biopharmaceutical realm. There is MedVenture Associates, which led our list of top 10 venture capital portfolios, but beyond Medventure, California has numerous other venture capital and angel investment groups making health care investments, including the Angels Forum, Mohr Davidow Ventures, and De Novo Ventures, to name a few.

Beyond the migration of jobs, the same Star-Ledger article points to other implications of these big pharma moves. “The impact of Schering-Plough can now be felt throughout the state, in its long-time support of education, the arts — even political campaigns. The Schering Foundation gives out millions in grants to nonprofit groups and schools around the state. Foundation records show grants ranging from $500,000 to Seton Hall Law School and $120,000 to the Liberty Science Center to $5,000 to the Union County Arts Center.”

It appears that the decline of New Jersey as the Medicine Chest of the Nation will be slow and steady but is well on its way. New Jersey’s leaders need to take some quick and bold steps to slow this attrition and bring renewed biopharma innovation to the state. This means focusing less on the number of pharma jobs in the state and thinking critically about the quality and innovation being driven by the pharmaceutical jobs in the state. It is also not unreasonable to suspect that highly talented researchers, sales, operations, etc., professionals from large pharma companies will be in demand at emerging companies, especially as some of these grow and offer prospects for the upside should things work out. This is the brain drain that the state should worry about in terms of jobs. Again, it is not something that happens overnight but can and will have deleterious impacts if it goes unchecked for a long time.

While the prospect of trying to replace huge pharmaceutical companies with start-ups does not represent a quick fix, it should and can be an arrow in the quiver of the state as they think about ways to stimulate and revitalize the state’s pharmaceutical industry.

In the meantime, it seems we should now hail California as the new king of pharma. ###