It costs hundreds of millions of dollars
and can take more than a decade for a
biotech company to develop a new therapeutic drug. Included in the
process are numerous lab and field trials
necessary for approval by the Food &
Drug Administration (FDA).
Financial performance in the development and clinical trial stages is measured
not in returns but in burn rate — how long
until the company burns through the
money in the bank. For most biotechs, a
healthy amount of cash would last 24
months.
In light of this, how does a biotech CEO
work through the disparity of a long-term
facility commitment versus short-term
cash constraints?
Basic research institutions like academic institutions, nonprofits and large
pharmaceuticals often own their real
estate. Venture-capital backed biotech
companies take a new idea, refine it,
position it, and seek FDA review and
approval.
Smart Business spoke with Shaun
Burnett of Irving Hughes to learn how to
plan for real estate needs while keeping
an eagle’s eye on burn rate.
Why should the biotech CEO focus on the
real estate?
One of the first challenges that a
biotech CEO must address after the company is initially funded is facilities. The
facility cost burden is the second-most-expensive fixed expense after payroll.
Parts of the puzzle the CEO must
quickly put together include where to
house the company, how large the supporting facility should be, how long the
facility will accommodate the company’s
needs, and technical and cultural considerations. The CEO must be wise and
strategic in how to spend cash so that
the bulk of the funding goes toward
moving the science forward.
What is unique about biotech facilities?
Biotech facilities usually require a significant build-out of raw space or an extensive remodel. They need to configure plumbing to properly dispose of lab
waste; to alter power and HVAC systems
to allow the unique cooling requirements; and to engineer water, vacuum
and gases to accommodate lab work.
Some biotech companies do research
using laboratory animals, and that
requires an entirely different level of discretion, security and infrastructure.
What is the market like for biotech space?
The shift in the biotech business model
away from early-stage discovery to outsourcing of R&D, and also to building
management teams around promising
Phase II clinical products, has ballooned
the supply of wet lab space to a historic
high. Most biotech companies today just
don’t need traditional wet lab space.
More than 1 million square feet of wet
lab space is available in Torrey Pines,
UTC and Sorrento Mesa. Average time
on the market for these properties has
increased to 19 months, and many
buildings have been on the market for
more than three years. Rents that used
to range from $3.00 to $3.50 NNN (triple
net) per foot have crashed by 25 percent to 30 percent.
What about the market for the biotechs you
mention that don’t need wet lab space?
The office market is similarly attractive
for life science companies that require
an all-office solution. The availability
rate in UTC is 18 percent with an average time on the market of 22 months.
While asking rents continue to hover in
the $3.00 to $3.30 full service gross per-square-foot range, actual negotiated
deals are being struck by Irving Hughes
at $2.60 per-square-foot range with parking concessions, and great subleases are
even less.
Del Mar Heights, which has been a
tight market due to the demand by legal
and financial service firms, has availability of 15 percent, and rents are flattening. Sorrento Mesa has an availability
rate of 26 percent with an average time
on the market of 18 months. This year
and next will be a great time for life science companies in San Diego.
Do some brokers specialize in biotech
properties?
There is a small community of biotech
real estate specialists. However, most of
them are dual agents, professing to act
as the representative for the biotech tenant but at the same time acting as the
landlord’s representative — or as the
actual landlord or silent investor of a
proposed property. The worst case for
the biotech CEO is when the same broker purports to act as a fiduciary for the
tenant while at the same time representing landlords. CEOs have to remember
that the brokerage firms that have the
landlords’ listings are just outsourced
marketing and leasing entities for property owners.
SHAUN BURNETT is a principal and senior vice president at
Irving Hughes. Reach him at [email protected] or (619)
238-4393.
