The US recession might be over, but the obstacles facing the biopharmaceutical industry are still plentiful. There’s the eurozone debt crisis, US healthcare reform, an inefficient FDA, and the list goes on. Combined, these factors create a landscape of uncertainty for biopharma companies. And unfortunately, “Uncertainty is the enemy of new project investment,” explains Mark Sweeney, senior principal of site selection firm McCallum Sweeney Consulting, Inc. (Greenville, SC).
The numbers reflect that reality. Biotech venture capital investment in 2009 totaled $3.54 billion, representing an 18.5% decrease from 2008, according to the 2011 California Biomedical Industry Report, published jointly by the California Healthcare Institute, BayBIO and PricewaterhouseCoopers LLP. While final numbers for 2010 haven’t been released, the report explains that VC investments in biotech had reached $3.14 billion in the first three quarters of that year, “leading to expectations that 2010 would be on par with the 2009 levels.” California, home to three established life science clusters, led the pack in venture capital investment in life sciences in 2010, followed by Massachusetts, Washington state, New Jersey and Pennsylvania.
FIG. 1. iNDUSTRIAL INFO RESOURCES COMPILATION OF CAPITAL PROJECTS IN 2011.
When it comes to actual project starts, the outlook is better. According to Industrial Info Resources (IIR; Sugar Land, TX), the US biopharma industry in 2011 kicked off $12.1 billion in 702 capital and maintenance projects (Fig. 1). “The number of projects increased, but the individual dollar value went down,” says Annette Kreuger, IIR vice president of research. “Rather than the $25-to- $50-million average enjoyed in the ‘golden years,’ the 2011 projects returned a still healthy average value of $17 million.” Early estimates from IIR put construction project starts for 2012 at $16 billion divided among 707 projects, which evens out to a per-project total of $23 million.
Pull of the clusters
So where are these dollars going? It’s no surprise that established life science clusters are seeing a lot of economic development. Known for their educated workers, sophisticated higher education systems, industry presence and access to venture capital, established clusters have all of the characteristics that are considered necessary for a biopharma company to innovate.
What these established clusters are not known for is their low cost of doing business. In fact, companies located in established clusters pay a premium to be there—in the form of higher rent and other operating costs. But it’s worth the added cost to these companies, says Sweeney, whose firm worked with Daiichi Sankyo last year to find a site for its first US manufacturing and packaging operation.
“Companies continue to locate in these established clusters because of the advantages of being with the industry,” he says.
“Companies are able to offset the high costs of operating in established clusters with the increased odds of innovation due to deep, rich talent pools and infrastructure,” explains the 2011 Life Sciences Cluster Report from Jones Lang LaSalle (JLL; Chicago, IL), a global real estate services firm.
FIG. 2. THE BOSTON REGION IS WELL AHEAD OF MOST OTHER AREAS IN INFRASTRUCTURE AND OTHER ASSETS FOR LIFE SCIENCES, SAYS JONES LANG LASALLE
Boston, which JLL ranked as the No. 1 established life science cluster in the US (Fig. 2), is one such hot spot of economic development activity. Novartis AG (Basel, Switzerland) is working on a $600-million overhaul of its Institutes for BioMedical Research (NIBR), near the campus of the Massachusetts Institute of Technology in Cambridge.
Maya Lin, the architect who designed the Vietnam Veterans Memorial in Washington, D.C., designed one of the buildings in the complex. According to a December 2011 article in the Boston Globe, Lin’s building will have a “main entry and an interior courtyard filled with trees and meandering pathways.”
“I wanted this to feel not like an isolated island, but something penetrable for everyone from MIT to walk around,’’ Mark Fishman, president of NIBR, told the Boston Globe. “We want people to mix there just as they would at a university.” Novartis expects to add 500,000 sq. ft. and 300 jobs by the project’s 2015 completion date.
Meanwhile, Vertex Pharmaceuticals (Cambridge, MA), maker of telaprevir, a drug for the treatment of hepatitis C, broke ground on its new 1.1-million-sq.-ft. headquarters complex on Boston’s Fan Pier last summer. The $800-million project is scheduled to be complete in late 2013.
In a battle of the clusters, Ipsen (Paris, France), a specialty pharmaceutical company, announced late last year that it would relocate its US headquarters from the Bay Area to Bridgewater, NJ, this spring, adding 100 jobs in the process.
“New Jersey is the leading biopharmaceutical center in the US,” Sean McKercher, president and general manager, Ipsen North America, told Site Selection magazine in December. “This move was a natural choice for Ipsen, given New Jersey’s ready access to international travel hubs, deep pool of pharma talent and business incentives for the biopharma sector.”
In addition to the established clusters, the JLL report identified nine emerging clusters in North America based on various criteria, including percentage of workforce devoted to high-tech research, venture capital funding and square footage of research facilities. Not surprisingly, many of the states where these emerging clusters are located are among the top 10 earners of life science venture capital funding, per the California Health Institute data.
Indiana, one of JLL’s emerging markets, has had several project announcements recently. In January, NantWorks, LLC (Los Angeles, CA) announced plans to locate a new pharmaceutical manufacturing plant at the site of the former Pfizer facility in Terre Haute. Expected to be operational by 2014, the plant will produce critical-care injectable and oncologic drugs. The $85.5-million project is expected to create 234 new jobs.
In late 2011, IntraPac Group (Toronto), a specialty packaging manufacturer, announced it would build an 80,000-sq.-ft. facility in Lawrenceburg, near Indianapolis. The company will move to Indiana from its current location in New Jersey. Other new projects include Quintiles’ (Durham, NC) $6.1-million contract research laboratory near the Indianapolis International Airport, and a $1.5-million headquarters expansion of biomarketing firm VMS, Inc., also in Indianapolis.
“The life science sector has a $44-billion total impact on Indiana’s economy,” says Chris Eckerle, director of life sciences for the Indiana Economic Development Corp. “With more than $9 billion in exports in 2010, Indiana ranked third in the United States. Indiana also has a superior economic specialization in the drug and pharmaceutical industry, standing nearly three times above the national average. Continuing to build on this strength is certainly a focus of our office.” Eckerle says Indiana is gaining international attention for its strengths in the life sciences and regularly competes with locations around the world.
Cluster competition heating up
When it comes to research and development, established clusters have a clear advantage. But the competition for other aspects of the pharma value chain can be aggressive. States, counties and cities boasting a lower cost of doing business and enticing government incentives continue to make a go at pharmaceutical companies for several reasons, one of which is the high-paying jobs a new project can bring. The annual average income of a biopharmaceutical worker was $118,690 in 2009, compared to $64,278 in the overall economy, according to The U.S. Biopharmaceuticals Sector: Economic Contribution to the Nation report published by Battelle Technology Partnership Practice in July 2011.
It’s a strategy that should pay off, says Norbert Vnek, principal at KLG Advisors (New York, NY), a boutique consulting firm that advises on location strategy. Vnek says pharmaceutical companies could benefit from looking at lower-cost locations to house their back office operations, like accounting and HR, and redeploy those operating costs into core components of the business, like R&D.
“For whatever reason, the pharma industry seems to be behind the curve on this practice,” says Vnek, whose company advised Pfizer before and during the merger with Wyeth. “That’s a curiosity, given the way the industry is changing. Every industry has its own culture and momentum for doing things, but there are some real driving forces in the industry that have very big revenue implications. Whenever revenue is threatened, you have to look at cost containment.”
Sweeney of McCallum Sweeney Consulting says one example illustrating the increased interest in cost containment is the economic development occurring in the South. Last August, Osmotica Pharmaceutical Corp. (Wilmington, NC), a drug-delivery technologies company, announced it would open an R&D and manufacturing plant in Marietta, GA. The facility plus 156 new jobs represent a $20-million investment over the next four years. Last fall, generics manufacturer Nephron Pharmaceutical Corp. (Orlando, FL) announced that it would bring a $313-million project—including a new manufacturing plant and 707 jobs—to Lexington County, South Carolina.
Leveling the playing field even more, Sweeney says, is a softer stance some states are taking on government incentives. “We have seen a noticeable difference on offers,” he says, pointing to Pennsylvania as one example. “These states still have tools in the toolbox, they just don’t have as much ammunition. Some of the programs aren’t quite as valuable as they used to be.”