William N. Hearn, Senior Vice President, Strategic Consulting, CBRE (Biotech Location Guide 2006)
In states and communities across North America, there is continued strong interest in developing and growing the biosciences. This industry has been studied for its potential, hyped for its great promise, and seen millions invested in economic development programs. The biosciences are no longer the new horizon, but the benefits continue to flow to regions that have well-established support networks and experience. It is as yet unclear if regions lacking or lagging in the industry requisites can make the leap through policy, infrastructure, or "creatively establishing" bioscience initiatives. This article presents an overview of the site selection issues facing biotechnology companies as we see them in our practice.
Over the last decade, the biosciences have experienced significant growth, despite risk and challenges from an investment standpoint. The current market capitalization rate of biotech firms is estimated to be more than $300 billion. Across the United States, it is believed that this industry employs almost 200,000 persons in 1,400 companies. Recent data indicates that average wage levels for this industry are significantly above prevailing regional wage scales - our research suggests that average wages are in the $50,000-$60,000 range. Biotech revenues have mushroomed from $8 billion in 1992 to $39 billion in 2003 in the health care area. In addition, biotech companies are research intensive, spending more than $100,000 per employee on R&D in recent years. (Unless otherwise indicated, industry statistics are from the Biotechnology Industry Organization.)
Biosciences may be better described as a set of technologies and applications, rather than a recognizable industry. Some areas of bioscience include:
• Medical diagnostics
• Drugs and medical therapeutics
• Bio-agriculture (foods and animal production)
• Environmental biotechnology
• Medical devices
In consideration of the potential returns, a plethora of states have launched initiatives to "nurture" the biosciences, often with financial inducements at their core. In terms of tracking the progress of such efforts, many regions look to annual economic updates produced by consulting firms, and track investment and job growth in their economy. There are important drivers that are critical to growth in the biosciences, reflected in programmatic efforts across the United States, and they impact site selection for firms in this industry.
• Funding: The biotechnology industry is comprised of a smattering of large companies and numerous small firms. Many of these firms are founded as small startups based on technology discovered in industry or within academia. These firms may ultimately reach a stage of production or, in a more likely scenario, become an acquisition for a larger company with greater resources, market reach, and business competency.
Traditional funding sources are often not as readily interested in biotech investing, as these firms may still be in the proof-of-concept stage and may not yet be generating revenue. In general, the industry has its own investors who focus solely on biotech and who understand the risk and rewards.
• Food and Drug Administration (FDA) approval and other regulation: Firms in this industry face heavy regulatory compliance that is time consuming, reliant on documentation, and always evolving. Regulatory issues are also expensive - the drug approval process within the FDA, for example - and the risks of noncompliance can be very costly. The ongoing Current Good Manufacturing Process (cGMP) requires that firms comply with government designated manufacturing standards. During site selection, many firms want to ensure access to regional offices of regulatory agencies.
• Industry concentration: Despite regional economic development efforts, this industry is highly concentrated in the Northeast major markets (Boston and New Jersey) and California, where the industry has grown around the pharmaceutical industry and new "big science" discoveries. This industry agglomeration yields direct results for companies in terms of a specialized work force, competent business services, and availability of facilities that are often highly specialized and expensive to build. We expect that over time, those companies that move into production may have less reliance on locations - such as these - where costs may be higher. In general, the site selection process may tend to focus more on proven areas as opposed to "emerging" areas because many companies will see the benefits of the support network.
• Specialized facilities: Biotech companies require expensive and specialized facilities. Due to a lacking critical mass in many markets, it is difficult to pursue a traditional real estate development approach, unless there are ways to minimize risk, such as public sector involvement in the deal. The credit worthiness of a tenant will also be a critical driver. Where an exit strategy is unclear and where the long-term viability of a tenant is uncertain, traditional real estate approaches are difficult to negotiate.
The Site Selection Process
in this industry will approach site selection in highly customized
ways, depending on timing requirements, internal ability to develop a
process (capacity), and internal decision-making styles. The process
followed will depend on whether this is a new facility, a need for
additional capacity, a consolidation event, or some other driving
factor. Given the nature of biotech and the number of small emerging
companies, we tend to see divergent trends categorized by large
companies utilizing traditional approaches for site selection, and
smaller companies using more informal approaches to the process (i.e.,
local market searches to meet demand or simply seeking real estate
solutions). We see several general trends in biotech-related site
• Risk aversion: Biotech companies tend to cluster to
take advantage of known areas where there is a proven record of biotech
activity. The benefits of this often have to do with access to capital
and the requirements of investors, access and proximity to key
scientific talent and technology, and the need to be close to other
companies in the industry in order to develop business relationships.
There is often a reluctance to be the first to enter a new market,
though notable exceptions exist for this - for example, when companies
are in a more advanced stage of the product life cycle, or where labor
requirements do not prevent biotech companies in a specific location.
Emphasis on incentives: Firms are aware of the economic development
emphasis placed on biotech. States and communities are continuing to
evolve in the way they try to support the development of this industry,
and, given the fact that many of these firms are not yet turning
profits, the incentives package can be an important component of the
site selection process. There are many examples of meaningful incentive
packages that have been offered in this industry, including: cash
payments of annualized tax payments over time; grants for specialized
machinery and equipment; loans and grant programs to facilitate
build-out; and a wide diversity of tax rebates, credits and other
traditional incentives. The innovative emphasis on this industry is
away from tax credits, as many emerging biotech companies experience
net operating losses. In most cases, this industry will be in a strong
negotiating position, given the right location and a fully developed
• Work force: Work force is an important
issue for many biotech companies. This relates to both the available
local work force and the ability to recruit talent nationally. It will
be a primary driver in site search, especially when there are specific
technical skill sets required and when a firm assumes it will compete
on a national level for talent - experienced biotech managers, for
example. Labor cost will come into play more on the production side,
where skill requirements are not as significant, or in cases where
skill sets are easily replicated. If the facility has an R&D
component, then in site selection the firm will seek to balance the
need for semi-skilled workers and scientific talent. Many areas have
specialized biotech initiatives that seek to fill the entire food chain
of required skills. BIOWORK in North Carolina is an example of such an
• Regulatory agencies: In many site searches, access
to FDA and other regulatory bodies will be very important. This is to
ensure regulatory compliance and access to agencies and experts on
matters of importance to the regulatory environment.
infrastructure: This includes the availability of specialized
facilities to handle diverse inputs, air and water quality needs, and
security needs. If these are in short supply in a region, this could be
a competitive disadvantage to developing a critical mass.
true with all site selection projects, the process will reflect all
criteria perceived to be important to the biotech firm. The priorities
established through feasibility analysis will be translated into
criteria for what is typically a multistep site selection process. Each
firm will likely have its own unique issues that will drive the process
to a set of finalist communities, negotiation, and selection.