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.