For a Lucky Few, Biopharma Expansion a Reality Again

Last April, Diplomat Specialty Pharmacy announced plans to centralize its operations in 340,000 square feet of space at the Great Lakes Technology Centre, the former innovation center for General Motors, in Flint, Mich. One rapid $7 million renovation later, the space has been transformed into a state-of-the-art headquarters and compounding and distribution facility for the growing specialty pharmacy, which experienced a 917% growth in sales from 2006 to 2009.

Purchased at auction for “pennies on the dollar,” according to Diplomat President and CEO Phil Hagerman, and supplemented by state and local economic incentives, the project has been a game-changer for the company. With the purchase of the 340,000-square-foot technology center, as well as the purchase a few months later of an adjacent 210,000-square-foot warehouse, the company acquired a 10-year growth footprint.

“At first, we were concerned that we would bite off too much,” Hagerman says. “But slowly we started to adopt that ‘go big or go home’ attitude. Normal business rules don’t allow companies to acquire a 10-year growth footprint, so we’re very lucky. It gives us a tremendous long-term competitive advantage.”

In many ways, Diplomat’s story is also a model for site selection in a post-recession world. Yes, many companies are still reeling from its effects: Sixty-six percent of life sciences executives who responded to a Deloitte survey said their companies experienced either a moderate negative effect or significant negative effect as a result of the recession. But other companies like Diplomat emerge unscathed and ready to expand. Their pick of properties, combined with attractive deals from state and local economic development agencies vying for their jobs, are helping to make biopharma expansion a reality again.

What companies want

As companies start to expand again, site selection observers will notice a shift, says Matthew McDevitt, executive vice president of real estate for BioMed Realty Trust (San Diego), a life sciences real estate investment trust with properties in seven core markets across the United States. Coming off a stretch of doing no deals in 2008, 2010 saw an increase in activity (the company posted $700 million in acquisitions last year) and some noticeable changes in what biopharma companies were looking for in a site.

“The biggest was speed to market,” McDevitt says. “No one is really willing to take a space from shell or scratch and spend the time to actually design and build it. They really want to take as much risk out of the equation and find existing space.”

Diplomat Pharmacy’s Flint, Mich., retrofit is one example of this trend. Another is Daiichi Sankyo, which announced in February that it is investing $15 million to open its first U.S. manufacturing and packaging facility in Bethlehem Township, Pa. The company was originally looking at Southeastern Pennsylvania, near the Greater Philadelphia life sciences cluster, when a former Amcor Pharmaceutical packaging facility was identified as a potential site in Bethlehem Township.

“After turning up nothing in Southeastern Pennsylvania, they indicated that the project had gone on the back burner,” says Michael Rossman, director of Pennsylvania Gov. Tom Corbett’s economic development action team. “Then, they identified this existing packaging facility that provided an opportunity for them. They expect to be operational there at the end of the year.”

BioMed Realty Trust’s McDevitt says he also has noticed a shift in the types of amenities companies look for during the site selection process, which he says speaks to their commitment to attracting top talent. “They want to provide a really nice environment for their employees,” he says. “Proximity to transportation, running paths, health clubs—all of those things are becoming very important. Now I hear a lot of ‘Where do my employees park their bikes?’ Or if we’re in a more suburban area, they want to see the cafeteria and the gym right away.”

Figure 1: Metropolitan Statistical Areas with the largest employment levels in drugs and pharmaceuticals, 2008

1. New York-Northern New Jersey-Long Island, NY-NJ-PA 49,752

2. Philadelphia-Camden-Wilmington, PA-NJ-DE-MD 17,584

3. Chicago-Napierville-Joliet, IL-IN-WI 17,029

4. Indianapolis, IN 12,396

5. San Francisco-Oakland-Fremont, CA 12,009

6. Los Angeles-Long Beach-Santa Ana, CA 11,318

7. Boston-Cambridge-Quincy, MA-NH 8,682

8. Durham, NC 6,755

9. Oxnard-Thousand Oaks-Ventura, CA 6,537

10. San Diego-Carlsbad-San Marcos, CA 4,673

11. Dallas-Fort Worth-Arlington, TX 4,208

12. Bridgeport-Stamford-Norwalk, CT 3,774

13. St. Louis, MO-IL 3,578

14. Washington-Arlington-Alexandria, DC-VA-MD-WV 3,478

15. Kalamazoo-Portage, MI 3,455

Source: Battelle/BIO State Bioscience Initiatives 2010

The cluster effect

Another trend concerns where companies will expand. McDevitt says he’s noticed a return to clustering, which is good news for the major biopharma hubs like Boston, Philadelphia, the Research Triangle Park, San Diego and San Francisco (see Figs. 1 and 2).

Pete Mooney, principal of the Deloitte Global Life Sciences and Healthcare Consulting Practice, says a new set of clusters, driven by demand for product, is forming in emerging markets like Brazil, China, India, Mexico, Russia and Turkey.

According to 35% of respondents to the Deloitte survey, emerging markets will become the most profitable geographic areas for life sciences. Twenty-six percent of respondents said geographic expansion into BRIC (Brazil, Russia, India or China) markets will be critical to their company in the next five years, while only 18% said it was critical prior to the onset of the recession at the end of 2008.

Two things are driving this interest in emerging markets: They’re huge markets and they’re currently underserved. “These companies understand that’s where the future is going to be, given the scale,” Mooney says. Eli Lilly, for example, announced last winter its plans to open a research center focused on diabetes in China. The center is expected to open later this year in Shanghai and will focus on discovering treatments that are best-suited for the estimated 92 million people in China with diabetes. This is not Lilly’s first foray into China; the company has had a large presence, including R&D and manufacturing facilities, in the country since the early 1990s.

Emering markets strategies differ

Other biopharma companies less familiar with emerging markets are still experimenting with what works. “We treat emerging markets like peanut butter, lumping them all together in one category, but they’re all really different,” he says. “The only thing they do have in common is they’re underserved.”

Some companies are leveraging their presence in neighboring countries. A good example, Mooney says, is Roche, whose presence in Japan is aiding its expansion into China. Japanese pharmaceutical companies are also using this tactic to enter emerging markets. “These guys are very aggressive,” Mooney says. “The Japanese pharma market is so saturated, and there are so many big players who have nowhere to go. So you’re going to see the Japanese as a real force in those markets, particularly China and India.”

Meanwhile, in Brazil and Mexico, biopharma companies are finding success relying on local expertise. Pfizer, Roche and Watson, for example, outsource many of their Brazil and Mexico operations to a company called moksha8, a Sao Paulo, Brazil-based company that bills itself as the “partner of choice for biotechnology and pharma companies looking to leverage the value of their product portfolios in Latin America.” The company was founded in 2007 and today boasts a portfolio of 220 commercialized products selling approximately $200 million in annual revenue.

Finding funding

The main barrier to expansion remains funding, which, at least from private backers, has all but dried up. According to the Battelle/BIO State Bioscience Initiatives 2010 report, bioscience venture capital investments in 2009 (the most recent year for which data were available) fell a dramatic 36.7% between 2008 and 2009 to $7.77 billion—lower than levels recorded in 2004. Deloitte’s Mooney says that’s not likely to change soon: “We haven’t seen large amounts of capital come back yet.”

That leaves state and other government agencies to sweeten the pot for biopharma companies. As was the case last year, though, many governments are cash-strapped themselves and are forced to make a hard decision—cut funding and other incentives for biopharma expansion or balance the budget. In Pennsylvania, while the government faces a budget deficit of more than $4 billion, it does not appear that incentives for biopharma expansion will be sacrificed, according to Chris Molineaux, president of Pennsylvania BIO.

“Through his proposed budget, the governor has demonstrated that this industry is important enough that we’re going to fund these programs,” Molineaux says, referring mainly to the Ben Franklin Technology Partners program and the Pennsylvania Life Sciences Greenhouse Initiative, two state-run programs that provide funding to life sciences companies that either locate or expand in Pennsylvania. Both programs continue to be funded under Gov. Tom Corbett’s proposed budget, which also includes an expanded R&D tax credit from $40 million to $55 million and the removal of the $20 million cap on net operating loss carryforward. A final budget is expected to be passed by July 1.

Pennsylvania has had success in the wake of the recession, welcoming new companies to the state, including the aforementioned Daiichi Sankyo, and breaking ground on several major expansion projects. Generics giant Teva Pharmaceutical Industries, whose U.S. headquarters is located in North Wales, Pa., just north of Philadelphia, announced in October that it would build a 1.2 million square-foot distribution and warehouse facility in a nearby location. According to Rossman, the almost $300 million project is expected to create more than 180 jobs and be operational sometime next year.

Also headquartered in Philadelphia, GlaxoSmithKline is in the process of re-establishing its headquarters at the Philadelphia Navy Yard, the 19th-century site of the first naval shipyard in the United States that has been undergoing redevelopment in recent years. The company signed a 15.5-year lease on a 205,000 square-foot facility. According to GSK, construction is now under way and is expected to be completed by the end of 2012 or beginning of 2013.

Other states haven’t been so lucky when it comes to their economic development incentives.

According to the Battelle/BIO report, “States will continue to face difficult fiscal times for the next several years that may cause them to roll-back many of the key economic development programs that were put in place over the last decade.”

Adds Rossman of the Pennsylvania governor’s office: “While we’re facing a deficit, it’s much less than what a lot of states are facing, particularly the ones we compete with. They’re implementing not just spending cuts, but also are facing some pretty significant tax increases.”

Party over in Puerto Rico?

It’s not a competitor of Pennsylvania, but Puerto Rico, which had been considered an ideal site for biopharmaceutical manufacturing, is now facing much uncertainty, thanks in part to a new tax imposed this year by Gov. Luis Fortuño. “Known as Law 154, the measure imposes a 4% excise tax on goods and services sold by companies on the island to overseas affiliates, with the rate scheduled to decrease to 1% by 2016, the final year it will apply,” reported Adam Burns in an December 2010 edition of Site Selection magazine. While Burns reported that companies with operations in Puerto Rico were “surprised and disappointed with the tax legislation,” it’s not likely to cause companies to flee, according to Deloitte’s Mooney. “From what people have been telling me, Puerto Rico still will be relatively attractive,” he says. “Some companies have made huge investments there, so I don’t see anyone pulling out in the short term. But I’m not sure how much new investment will be going on there.”

According to an October 2010 white paper on surplus property by the Industrial Asset Management Council (IAMC), of the 20 pharmaceutical manufacturing sites that were closed on the island, only two to three were sold to pharma users of any sort. Still, “the island holds benefits for the global pharma business,” according to the IAMC. “It is a dollar-baed economy. It permits a ‘Made in the USA’ label—very important given the strong U.S. inspection regimen covering pharma products. Education levels are still strong and employee applicants graduating are well qualified to train and work in the industry.” PC

BOX: UNDER CONSTRUCTION

Check out these recently announced or completed projects:

Astellas Pharma U.S., Glenview, IL, and Santa Monica, CA

This Japanese drug company is building a new $150 million U.S. headquarters in Glenview, IL., and a $90 million manufacturing and R&D center in Santa Monica, CA, the home of biotech firm Agensys, which Astellas acquired in 2007. Construction in Illinois is slated to be complete in the spring of 2012, while the R&D center won’t be ready for occupancy for another two years. Together, the facilities are expected to create about 250 new jobs.

Bayer Schering Pharmaceutical U.S. Innovation Center, San Francisco

This 49,000 square-foot research and development facility developed by Alexandria Real Estate Equities opened in January. Bayer chose San Francisco as the site “because of the leading role this area’s research community plays in life science discovery,” the company stated in a press release.

BioBAT Bioscience Center, New York

Expected to create more than 1,000 jobs, BioBAT is a nonprofit partnership between New York City Economic Development Corporation and the State University of New York. The 500,000 square-foot space at the Brooklyn Army Terminal is being developed in stages to help bioscience companies—from early to late stage—secure hard-to-come-by space in the NYC area. “We are now developing 85,000 sq. ft. and this should be complete in Spring 2012,” says Eva Cramer, president of BioBAT. “We are actively meeting with a number of very interested tenants and expect to continuously add new space as demand warrants.”

Almac Group, Souderton, PA

Almac, based in Northern Ireland, chose the greater Philadelphia region for its $120-million, 240,000-sq.-ft. North American headquarters, officially opened in May. The complex, which will employ over 1,000, includes administrative offices and facilities for the production, analysis and distribution of clinical trial materials. Other US facilities are in California and North Carolina.

GlaxoSmithKline, Philadelphia

This global pharmaceutical giant is relocating its North American headquarters from Century City, Philadelphia to the Philadelphia Navy Yard, a 19th-century naval shipyard that has underwent redevelopment in recent years. The space, which will be designed to achieve the highest LEED certification level, will feature an open layout that will encourage collaboration. “We are delighted to continue our proud Philadelphia history, which dates back to 1830, and to offer our employees an exciting and collaborative new work space,” says Deirdre Connelly, president of GSK’s North American operations.

BOX: THE PROBLEM WITH SURPLUS PROPERTIES

In October 2010, the Industrial Asset Management Council (IAMC) released a white paper on surplus properties in the life sciences industry group. As a result of the recession, as well as contraction and consolidation of the biopharmaceutical industry, surplus properties are plentiful—some even affordable. But that doesn’t necessarily make them attractive for biopharma companies. One reason, according to the white paper authors, is that “the investment required to reconfigure facilities is not cost effective.” As manufacturing shifts from small molecule to large molecule, for example, space requirements become much different, and construction or renovation costs can range from $500—$1,500 (or higher for higher-tech facilities) per square foot, according to IAMC.

Another reason these surplus properties don’t make attractive sites for biopharma companies is that the “reuse investment capital is often unavailable or unattainable,” the white paper explains. Blame the recession, as well as healthcare reform, for the instability that fueled the unavailability of capital.