Market Report: Advances in Biotech Help Life Sciences to Thrive
Biotechnology is driving growth in the life sciences sector, which has faced numerous challenges, particularly in the pharmaceuticals industry.
Beth Mattson-Teig (Q4 / Fall 2013)

{{RELATEDLINKS}}Earlier this year, it was difficult to escape talk of the looming fiscal cliff that threatened to shake the U.S. economy. The life sciences industry has been battling its own challenging precipice — the patent cliff.

The patent cliff, or the mass expiration of patent protections on a variety of drugs, is fueling significant change among big pharma companies and the broader life sciences industry. In 2013 alone, patents will expire on drugs that currently have sales of about $29 billion annually, according to data from EvaluatePharma. Those patent expirations are a big blow to large pharmaceutical firms such as Johnson & Johnson, Pfizer, and Roche that now face more competition from generic drug-makers.

“Over the last few years, that patent cliff has been significant, and it has forced a lot of consolidation within the industry,” says Roger Humphrey, an executive managing director and lead of the Life Sciences division at Jones Lang LaSalle. Following years of growth, the life sciences industry is now facing a more challenging climate marked by expiring patents and greater competition from generics, as well as pricing pressures to provide affordable healthcare and heightened regulatory scrutiny.

Patent expirations are at the forefront, because they are creating margin and price pressures within the pharmaceuticals industry. The global generic drug market is expected to grow at an annual rate of 10 percent between 2010 and 2015, from $87 billion to an estimated $140 billion, according to a 2013 “Global Life Sciences Outlook” report issued by Deloitte Consulting. That profit loss is fueling a wave of merger and acquisition activity as pharmaceutical firms try to acquire a pipeline to new patents and create added operational efficiencies.

The global generic drug market is expected to grow at an annual rate of 10 percent between 2010 and 2015, from $87 billion to an estimated $140 billion, according to a 2013 “Global Life Sciences Outlook” report issued by Deloitte Consulting.

There is definitely a trend to acquire similar life sciences organizations in order to acquire drugs that are in discovery to help backfill that patent expiration loss. There also is a notable trend among big pharma firms that have built their business on the chemistry side to expand into the biology side of biotechnology, adds Humphrey.

Growth Shifts to Biotech
The biotech sector has been a shining star in the life sciences industry in recent years. Biotechnology uses biology to develop technologies or “grow” new solutions and products for applications ranging from battling diseases and enhancing crop yields to creating products that can be made to improve food preservation. The biotechnology sector has been on an accelerating growth track even during the recession. For example, the global “biosimilar” market — the use of biology and living molecules rather than chemistry to create drug solutions — was valued at $420 million at the end of 2010 and is expected to grow at a 52.2 percent rate through 2014, according to Deloitte. Another sign of the biotech industry’s growth is a surge in IPOs in 2013. Year-to-date through September, 23 U.S.-based biotech firms had launched IPOs, compared to 13 in each of the last two years.

Currently, there are more than 250 biotechnology healthcare products and vaccines available to patients, many for previously untreatable diseases. More than 13.3 million farmers around the world use agricultural biotechnology to increase yields, prevent damage from insects and pests, and reduce farming's impact on the environment. And more than 50 bio-refineries are being built across North America to test and refine technologies to produce biofuels and chemicals from renewable biomass, which can help reduce greenhouse gas emissions, according to the Biotechnology Industry Organization.

The promising future for this niche is attracting attention from pharma companies that are looking to find new avenues of growth. “I think that there is going to be continued acquisitions of biologics companies, but very targeted acquisitions,” notes Humphrey. In particular, there is likely to be a lot of focus on DNA type of research that focuses on very specific areas of illness versus broad spectrums of illness, he adds.

Another segment of the life sciences industry poised for growth after weathering the recession is medical device manufacturing. The sector does face concerns that a tougher regulatory environment and a new 2.3 percent medical device tax will hamper growth. However, the sector is expected to benefit from the influx of newly insured people created by the healthcare reform bill, as well as the aging population that is sparking demand for everything from hip replacements to pacemakers.

According to data from Jones Lang LaSalle, there are an estimated 9,274 firms within the 21 markets it tracks that currently employ more than 311,000 workers. A common theme that will continue to drive decision-making among medical device manufacturers, as well as the broader life sciences industry, is the focus on delivering value as the industry faces more pressure to deliver affordable healthcare solutions.

Next: Merger and Acquisition Activity Leads to RE Portfolio Optimization

{{RELATEDLINKS}}Optimizing Real Estate Portfolios
Recent merger and acquisition activity is definitely having an impact on location decisions and the physical footprint of life sciences companies. Mergers and acquisitions often occur among firms that are located in the same geographic markets; there is duplication and redundancy of facilities and infrastructure.

“The story in most markets is that big pharma has been shrinking,” says Thomas Sullivan, a senior vice president at CBRE in East Brunswick, N.J., and director of the advisory board for CBRE’s Life Sciences Group. Drug manufacturers started shrinking in New Jersey a decade ago, he notes. The impact has been felt more in the office sector, and to a lesser extent in R&D space as pharmaceuticals companies have downsized in those areas.

“That consolidation is still occurring and the impacts are still being felt, although we are starting to see the end of the curve as far as the big pharma decisions — at least for our region here in New Jersey,” says Sullivan. For the most part, decisions have already been made as they relate to leases that companies decided not to renew, campuses they plan to vacate, and R&D facilities that will be relocated. The transactions that follow those decisions are still trailing in terms of disposing of those assets or backfilling empty space, he adds.

For example, it was announced earlier this spring that real estate firm Advance Realty and a Boston-based investment partner have acquired the former Sanofi U.S. research and development complex in Bridgewater, N.J. The developer plans to relocate its own headquarters to the site and also is reportedly looking at plans to redevelop parts of the 1.2-million-square-foot campus that sits on 110 acres. Paris-based Sanofi vacated the campus after relocating its U.S.-based R&D operations to Cambridge, Mass. That project will most likely be a redevelopment opportunity due in large part to the age of the existing office space, notes Sullivan.

“M&A activity will continue to be a major driver toward location decisions,” says Sullivan. Once those mergers occur, there will be more focus on portfolio analysis on what are now combined operations and global redundancy. That will continue to have an impact on the life sciences industry over the next several years, he adds. “There is no transaction — of any scale — that you see in the marketplace that does not lead to some real estate implications,” he says.

Yet where large pharma companies are shrinking, biotech firms are picking up the slack. In New Jersey, Celgene Corp. is one firm with a large and growing footprint. That firm owns their primary campus in Summit and continues to absorb additional leased space in the market — perhaps 200,000 square feet of office absorption each year.

Another trend among both big pharma companies and some middle market biotechnology firms is to create efficiencies and run leaner by focusing on core competencies and choosing to outsource other functions, such as facilities management, real estate, and employee benefits. Companies also are opting to outsource core functions, including contract research, contract manufacturing, and contract packaging and shipping of products. Centralizing services and outsourcing non-core competencies will be a bigger focus going forward as companies look for ways to create greater efficiencies and operate more profitably.

Clusters Remain Strong
The life sciences sector as a whole remains a formidable industry. The global pharmaceuticals, biotechnology, and life sciences industries generated total revenues in excess of $1.1 trillion in 2011. Between 2007 and 2011, the global pharmaceuticals, biotechnology, and life sciences sector has been growing at an average rate of 6.7 percent, according to Deloitte.

The sector relies heavily on talent, which is why location decisions focus primarily on existing clusters. Although there are a number of strong and growing clusters across the United States — from Minneapolis to Austin — the largest hubs for life sciences based on firms and employment numbers continue to be Greater Boston, San Diego, and the San Francisco Bay area.

The Boston-Cambridge cluster is the country’s largest. There has been growth from both the large pharmaceutical firms, as well as a younger generation of start-ups that are growing in the greater Boston Area, notes Ted Lyon, a senior managing director and principal at Cassidy Turley in Boston. For example, The Massachusetts Life Sciences Center board of directors awarded a $5 million capital grant earlier this year to help fund the establishment of LabCentral in the Kendall Square area of Cambridge. The state-of-the-art facility will serve as an incubator for biotech start-up firms. In addition, several life sciences firms in the Boston area have held successful IPOs this year to add additional capital to fuel growth. “That is all positive in our market,” says Lyon.

Life sciences firms also are driving build-to-suit activity with long-term lease commitments. “That has been happening for the last couple of years and this year is no different,” Lyon notes. One of the largest projects is the Alexandria Center at Kendall Square. The seven-building, mixed-use redevelopment will span more than 1.75 million square feet when fully developed, including apartments, office, and retail space. The project calls for 1.53 million square feet of office and lab space. The first building in this phased development project will be completed in the fourth quarter of 2013. Biogen Inc. is one of the firms that has committed to locating its new headquarters here.

In sum, although there is going to be shrinking in some life sciences sectors, most notably among pharmaceuticals, growth is on the rise in other areas such as biotech. “That is why the clustering around places like San Francisco, Boston, and San Diego is going to continue, because that is where the talent is in this type of science,” concludes JLL’s Humphrey.

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