Site Selection 2010: Development Authorities Recalibrate Their Pitch as Biopharma Growth Slowly Rebounds

Cushman & Wakefield is finalizing a white paper examining the role the life sciences sector plays in influencing real estate growth. The paper, expected at the end of Q2, is a follow-up to a similar report released in 2007, which credited the life sciences sector as a growth driver. In the course of three years, and in the wake of the Great Recession, the commercial real estate firm’s message is now about the challenges facing the industry that are limiting its ability to expand.

Chris Kinum, author of both reports and executive director of Cushman & Wakefield’s Global Life Science Practice (East Rutherford, NJ), points to a couple of major game-changers in the life sciences landscape. First, last year’s flurry of mergers between pharmaceutical companies, including Pfizer and Wyeth, Roche and Genentech, and Merck and Schering-Plough, virtually eliminated big pharma’s need for new expansion. These companies had been a main source of marquee projects in past years. Also, Kinum says, changes to the healthcare system signed into law this year are changing the cost and pricing structure for many biopharma companies, which will have a negative impact on their P&L statements, further limiting their ability to expand.

The site selection game has changed. Biopharma companies are still using the same checklist: low cost of doing business, access to a skilled labor pool, high quality of place and a culture of innovation. But gone are the days of marquee projects creating thousands of jobs and millions in revenue for single communities. Today, the projects are smaller, the competition is fiercer and the stakes are higher. To succeed, the economic development authorities in many cities and states are being forced to reshape their recruitment strategies, and in some cases, reinvent themselves.

Taking a more focused approach

Despite the nationwide lack of activity in new biopharma site development, Joe Snell, president and CEO of Tucson Regional Economic Development (TREO), says his city’s recruitment success rate is “through the roof.” Earlier this year, Sanofi-Aventis opened a new 110,000-square-foot Tucson Research Center, more than doubling its footprint there. The impact of the 2008 acquisition of Tucson-based Ventana Medical System by Roche Diagnostics has yet to be fully realized, but Snell expects the number of jobs to balloon from 645 to 3,000.

An emerging bio center whose 100-plus companies generate $6 billion in revenue annually, Tucson has all the right assets to attract and retain biopharma companies. Major pharma companies already are located there. It’s home to the University of Arizona, as well as the country’s eighth-largest community college system. And Snell classifies his state as “very aggressive” when it comes to offering strong financial support to bioscience companies locating in Arizona. The city also has invested $1 billion in a downtown revitalization project and is on the fast track to establishing a light-rail system. Tucson also has taken on an even more targeted approach to recruiting new businesses: Through a strategic planning process initiated in 2006, the city carved out an economic blueprint that identified and then focused on diagnostics as a primary industry that could realistically help establish Tucson as a leading biotech center. As a result, TREO now focuses its bio recruitment efforts on diagnostics companies. “Like many cities and states, Tucson was shot-gunning its approach, targeting the whole bio industry,” Snell says. “But now we’re much more focused, and it’s really paying off. We’ve realized it’s better to be deep with a few industries than to dabble in many.”

Taking a more focused approach to recruitment is a trend that Jay Garner, president of site selection consulting firm Garner Economics (Atlanta), is seeing with economic development organizations across the country. “Eight years ago, everyone wanted to be a biotechnology capital of the world,” says Garner, who this year is working with the Research Triangle Park Foundation on a new comprehensive master plan. “Now they’re looking at doing things smarter. They’re getting more strategic with their marketing and targeting companies that fit their niches. They see the value of focusing their resources smartly, rather than throwing a bunch of marbles up in the air and seeing where they land.”

Utilizing logistics expertise

For Indiana, the focus in the past few years increasingly has been on supply chain and logistics. The state, which is already home to major pharmaceutical companies like Eli Lilly and Roche Diagnostics, welcomed Medco Health Solutions, the largest US pharmacy benefits manager, to a new mail-order pharmacy and research facility last year. The 452,000-square-foot facility is located in Anson, a 1,700-acre mixed-use development in Boone County situated right on the I-65 corridor near Indianapolis.

In choosing the greater Indianapolis area, Medco president Kenneth Klepper noted the site’s location and access to infrastructure as key in helping the company get prescription medications out to patients in a timely and cost-effective way.

Last year, PBM giant ExpressScripts (St. Louis) took over WellPoint’s in-house PBM and its specialty drug distribution facility at the Indianapolis Airport. The company plans to add 182 jobs at that facility by the end of 2012, the Indiana Business Journal reported in January. The company is also expanding in St. Louis, which chose that city over Philadelphia as the site for its new $60-million drug distribution facility.

A logistics hub, the Indianapolis International Airport is the eighth-largest cargo center in the US and the 21st-largest in the world, according to Airports Council International-North America. It’s home to the second-largest FedEx distribution center in the world, and global logistics company DB Schenker also has a large presence at the airport, which is located within the Greater Indianapolis Foreign Trade Zone. In 2006, the company worked with the Indianapolis Airport Authority to create a state-of-the-art cold-chain operation. Airport Authority Air Service Director Christofer Matney says the proprietary program, now in its fourth year, has been successful in mitigating the risks associated with transporting temperature-controlled materials, not only for DB Schenker but for other supply chain companies that have been able to take advantage of the facility. “The aircrafts are landing without any issues, and products are able to get staged indoors with minimal ramp exposure. It’s been very successful for them.”

Matney notes that Indianapolis has long had a presence of companies involved with temperature-controlled supply chain logistics, but the DB Schenker facility has added to that expertise, making Indianapolis an even stronger center for this type of transportation. “Fifty-four percent of temperature-related excursions for pharma air cargo occur at the airport itself,” Matney says. “It’s clear that the airport and its environment are an area where most improvement in cold-chain transportation can be found. We’ve been very fortunate to have been able to help these companies create an environment where excursions are not an issue.”

The Indianapolis Airport also boasts a new passenger terminal, which officially opened in November 2008. While having no effect on the transportation of cargo, the new terminal did make an impact on Medco when it was considering Indianapolis as a location, Matney says. “They mentioned the quality of the new airport serving as a welcome mat to visitors and potential clients they would bring to the region. Before, the airport was a function as opposed to a source of inspiration. It’s helped fuel a lot of enthusiasm toward economic development activities.”

Kristin Jones, president and CEO of the Indiana Health Industry Forum, expects her organization’s upcoming supply chain conference to fuel interest in the state, as well. The Midwest Healthcare Supply Chain Conference, sponsored by IHIF and the Indianapolis Airport Authority, will attract more than 200 attendees from the Midwest and the East Coast to Indianapolis May 20—21. “The first day will deal with broader issues of supply chain management, and the second day is dedicated to temperature-sensitive supply chain issues,” Jones says. “It will be another way for Indiana to reinforce the strengths that we have and to raise awareness of this piece of the business.”

Highlighting government’s role in attracting biopharma

While infrastructure improvements are key to developing a buzz around economic development, so is a government that understands the value biopharma companies bring to a state, says Caren Franzini, CEO of the New Jersey Economic Development Authority (NJEDA).

In New Jersey, biopharma companies have a friend in newly elected Gov. Chris Christie and Lt. Gov. Kim Guadagno. “They meet personally with leading biopharma companies in the state to talk about two things: that we want them to stay in New Jersey and to ensure that New Jersey is doing all that can be done to make sure we have a business-friendly environment,” Franzini says. “They’re proactive in reaching out to businesses currently located in New Jersey, but also ones seeking to come into the states.” NJEDA also works closely with groups like BioNJ and the bio industry already established in New Jersey. “They are very much our partners in attracting new companies here, and we’ll continue to utilize them to grow the industry,” Franzini says.

Another government contribution is the incentives, which, due to budget constraints, are on the verge of drying up in many states. Franzini says New Jersey still offers compelling incentives, pointing to the success of the state’s Business Employment Incentive Program, which offers annual incentive grants to new or existing New Jersey companies that create jobs.

Among the 2009 recipients receiving grants through this programs were ImClone, based on its plans to create 900 jobs at a new production facility in Branchburg. The company received $32 million from the state. Bausch & Lomb also received employment incentives totaling $3.5 million from the state for 70 jobs at its new global pharmaceutical headquarters, which opened in Madison in July 2009 (corporate HQ remains in Rochester, NY). Under another incentive program administered by the NJEDA and designed for R&D companies, 40 companies received $33 million in tax credits in 2009, an increase of $7 million over the previous year.

Investing in biopharma

Nowhere are the incentives more impressive right now than in Massachusetts, named the nation’s top life sciences cluster by the Milken Institute in its 2009 report, “The Greater Philadelphia Life Sciences Cluster 2009: An Economic and Comparative Assessment.” Companies are being lured to the New England state to take advantage of incentives and other programs created under the Life Sciences Initiative, a 10-year, $1-billion research and economic development investment program introduced by Gov. Deval Patrick in 2007.

Dr. Susan Windham-Bannister, president and CEO of the Massachusetts Life Sciences Center, oversees the administration of various economic development incentive programs, including the Life Sciences Tax Incentive Program. In 2009, the center awarded $25 million through this program to 28 companies that committed to creating more than 800 jobs this year. Among the recipients was British drugmaker Shire Pharmaceutical, which received $4.5 million for 150 jobs at its new Human Genetic Therapies facility in Lexington.

The initiative also funds infrastructure improvements, like the $12.9-million grant to the town of Framingham for a new wastewater facility that would help attract Genzyme Corp., which is building a biomanufacturing facility there. “Framingham was very appealing to them, but it was an old city, with an old infrastructure,” Windham-Bannister says, adding that the company was also considering North Carolina for the site of the new plant. “Without the infrastructure improvement, it would not have been a viable site.” Between the infrastructure work and the new facility, Windham-Bannister estimates that more than 300 new manufacturing jobs and 165 jobs in construction will be created.

The center administers nine different tax incentive programs that address the cost of doing business, plus a number of workforce-related programs to address another top concern of biopharma companies—finding qualified workers. “One of the things we heard companies tell us was that they need an entry-level workforce that knows its way around the lab and understands the commercialization process,” Windham-Bannister says. As one way to address that need, the center created the Life Sciences Internship Challenge, which last year placed 104 interns at 59 life science companies and research institutions across the state. “We got rave reviews from the companies that participated and, as a result, we’re expanding our investment in the program from $500,000 to $750,000 for next year,” Windham-Bannister says. “This program gave companies an easy way to see all of the talent that is here. It also makes sure there’s not just a good supply of talent, but a good distribution across the state as well.”

Fighting to stay on top

California is one of the major life sciences hubs in the world. According to “The California Biomedical Industry 2010 Report,” published by the California Healthcare Institute and PricewaterhouseCoopers, the state’s life sciences industry accounts for 274,000 jobs paying an average salary of $75,000 annually. “Life sciences companies in California employ more people than the movie industry or the aerospace industry,” says report co-author Tracy Lefteroff, National Life Sciences Partner, PricewaterhouseCoopers. In the same 2009 Milken Institute report placing Boston in the top spot in the US, three California metro areas—Greater San Francisco, Greater Los Angeles and San Diego—ranked in the top 10. No other state can claim that many clusters. But no other state can claim as large of a budget deficit either.

“We’ve fought hard and made some great strides in the last several years to create a better business climate for bio companies in California,” says BayBIO President and CEO Gail Maderis, pointing to an increase in the net operating loss carryforward period to 20 years and the implementation of single sales factor apportionment, among other corporate tax reforms.

But Maderis says there’s fear among the life sciences industry that as the legislature tackle the $20-billion budget gap this year, lawmakers will try to revoke or defer some or all of these provisions that help tilt the playing field for California when it comes to competing on the cost of doing business. “That would be tragic, and it would definitely send the wrong message about California to the biotech community,” she says. Maderis also points to another threat facing the future of biopharma in California: the pressure that the budget is putting on the state education system, which is a key source of the state’s qualified workforce.

Lefteroff of PwC believes the key to California remaining a leading bio hub is its ability to attract and retain manufacturing sites. However, in the PwC survey of California life sciences companies, 63% of respondents said their out-of-state manufacturing operations had expanded in the past year, and 66% expect out-of-state manufacturing operations to expand in the next two years.

To help refocus the state on the life sciences, BayBIO proposed a new position for a state biotechnology director, whose job would be to attract and retain biotech companies. “Essentially, the state of California is taking this industry for granted, and it can’t continue to do that,” Maderis says. “Other states are becoming more aggressive in wooing biotech.”

The bill was introduced into the state Assembly by Assemblyman Jerry Hill of San Mateo. “If we have a commission on blueberries, we should have something on biotech,” he said at a press conference earlier this year. Maderis hopes to see action on the bill this summer.

Despite the challenges, both Maderis and Lefteroff agree that California continues to do well in its ability to attract and retain biopharma companies. “There’s a recognition of a unique microclimate here,” Lefteroff says. “Companies continue to locate here for all the same reasons people came in the first place.” PC

Competition Goes Global

China, Singapore, South Korea—notice a trend? All eyes from California to Massachusetts are on Asia as a major player in the now global site selection competition for biopharma expansion and relocation.

China: Chris Kinum of Cushman & Wakefield says this country has seen explosive growth: “China is developing a middle class rapidly. Twenty-one cities have more than a million people. There’s a middle class with disposable income, so companies can go over there to make their product cheaply, and now they can also sell it there. That’s a huge paradigm shift.”

South Korea: As the host of the 2010 International Association of Science Parks (IASP) conference, South Korea is increasing its visibility as a thriving bio center, says Jay Garner of Garner Economics. According to the Korea Biotechnology Industry Organization, the bio industry market size in 2006 was US$2.3 billion; the goal for 2011 is to produce $20 billion and export $10 billion.

Singapore: “Singapore is trying to develop a manufacturing base for more mature companies, so that’s on the horizon as a competitive threat,” says Tracy Lefteroff of PricewaterhouseCoopers. “Over the next five or 10 years, you could see them growing in influence.” Gail Maderis of BayBIO adds that Singapore never had the venture capital and investment necessary for a bio hub, but “the government stepped in and basically created those things,” she says.

The Rise of Research Parks

Last year, Pfizer announced that as part of its consolidation with Wyeth it would close its 750,000-square-foot research headquarters in New London, CT, in 2011. So what will happen with the facility? A company that needs 750,000-square-feet could move in, but that list of potential buyers can’t be long. Another solution could be to transform it into a research park. That’s what the University of Michigan did when it purchased a former Pfizer research complex, now called the North Campus Research Complex, in Ann Arbor, MI, in June 2009. “The school is now considering public-private partnerships to help recoup some of its investment in the facilities, as well as expand their collaboration and intellectual property,” says Chris Kinum of Cushman & Wakefield.

Real estate investment trusts (REITs) also are in the research park business. Kinum points to the Alexandria Center for Science and Technology at the East River Science Park in Manhattan as one example of a REIT-developed park. The first phase is expected to be complete this summer. “So much research goes on in New York City and the feeling was that companies were being invented there but then they’d leave,” says Kinum, whose firm serves as broker for the Alexandria Real Estate Equities-owned property, which last year scored Eli Lilly’s ImClone as its first anchor tenant.