By Roger Humphrey
In a new paradigm of the life sciences industry, corporate real estate can be a source of top-line value.
The patent cliff was only the beginning of cost pressures in the life sciences industry. Today, new healthcare reform initiatives in the United States and elsewhere are transforming the business of life sciences around the world. New pressures are emerging from the shift to value-based product pricing, while regulatory and cost pressures continue to grow.
To thrive in this dramatic new landscape, life sciences companies must push for even greater research and manufacturing productivity — without compromising the integrity of their systems and facilities.
It’s a paradigm shift that requires biopharmaceutical companies to take innovation beyond R&D and into their operations. One area ripe with potential is corporate real estate and facility management. After R&D, real estate costs are among the most significant expenses for life sciences companies, encompassing offices, highly technical laboratories, and sophisticated facilities necessary for producing drugs or biological medicines in compliance with complex quality and safety regulations.
As life sciences companies continue their quests for efficiency, corporate real estate and facilities management strategies have the potential to support shifting business priorities and to drive top-line value. These strategies are not just the purview of the global corporations, but can also be adopted by middle-market companies facing equally severe cost pressures.
Strategy #1: Choose The Right Spaces In The Right Places
Now more than ever, strategic site selection and optimal use of resources are crucial for the success of biopharma companies. Whether a company owns or leases its facilities, the costs of real estate operations can be considerable, especially if facilities are located in high-cost cities.
Given today’s narrow profit windows, the challenge lies in balancing real estate costs in a particular city against the potential advantages of gaining vital access to multidisciplinary research talent, new market opportunities, potential business partners, and production facilities. Sometimes it is worth paying more for facilities with proximity to potentially game-changing resources, and that is exactly what some companies are doing.
As noted in JLL’s annual Global Life Sciences Cluster Report, life sciences companies have been right-sizing their corporate real estate footprints in mature U.S. and European markets to improve their operating efficiency. Nonetheless, cities such as Boston and Zurich continue to be top clusters of life science activities despite extremely high real estate costs because these cities provide access to top research institutions, promising biotech start-ups, and capital. Concurrently, some life sciences companies are expanding operations in emerging markets where new markets and clinical trials resources abound.
Strategy #2: Don’t Overlook Facilities In Mergers & Acquisitions
Mergers, acquisitions, business unit spinoffs, and creative joint ventures complicate the facilities picture, which is why a company engaging in these activities should include a knowledgeable facilities strategist in the decision making. Although the hope of greater efficiency is a major motivation for M&A, some companies overlook or mismanage a major source of potential value — the corporate real estate portfolio.
Mergers and acquisitions are occurring more frequently among large biotechnology and specialty pharmaceutical companies than among the global concerns, according to Ernst & Young’s January 2014 The Shifting Balance of Firepower. Overall, executives in the sector anticipate significantly more acquisitions in 2014 than in 2012 or 2013.
Engaging the corporate real estate team during the high-risk due diligence phase will help a company better understand the value and the risk that may be hidden under layers of leases and building valuations. Regulatory restrictions, of course, mean that a company never has all the advance detail it wants. However, having an external real estate partner can provide quick access to real-time global real estate market intelligence to support facilities decisions and detailed scenario analyses.
The corporate real estate team should include a program management function to streamline integration activities. A wellrounded execution team will include commercial real estate brokers experienced with M&A, along with workplace strategists, CPAs, legal specialists, architects, and project managers. Change-management specialists are also essential for engaging employees during facilities transitions.
Companies need to ask the right questions during the M&A due diligence process to drive the most value from the corporate real estate portfolio — not to just cut costs. What locations will attract the best and the brightest scientists? Where do portfolios overlap? What is the value of surplus facilities? Are there hidden risks in the portfolio that will hinder integration? What will the fully integrated portfolio look like and when?
The real estate team must be equipped to address a potentially large and complex portfolio of diverse property types. A company’s portfolio may include not only office and laboratory facilities, but also data centers, a product distribution network, traditional and biologic manufacturing facilities, global sales team offices in emerging markets, and other specialized properties.
This team should plan in advance where redundant facilities can be quickly consolidated when the deal is closed. Otherwise, the lag time between executing a business strategy and aligning the corporate real estate with the strategy can be lengthy and costly. The more quickly the corporate real estate team moves, the more quickly a company can realize the advantages of consolidation.
For example, when Merck acquired Schering-Plough in 2009, the corporate real estate team reduced the combined companies’ occupancy costs by $300 million within three years — making a significant contribution to the $3.5 billion merger synergy goal. For Merck, the value hidden within the corporate real estate portfolio was the “X factor” that contributed to the transaction’s success. However, Merck’s corporate real estate goal was to build long-term productivity by creating highly efficient and effective business and laboratory locations and workplaces, rather than focusing solely on short-term savings.
Strategy #3: Invest In Facilities-Compliance Expertise
Always a critical issue for life sciences companies, regulatory compliance is everpressing as companies seek new markets and R&D opportunities in emerging markets such as Southeast Asia, India, and Latin America. As the life sciences industry continues to evolve, organizations that maintain the highest quality standards throughout their facilities will find the greatest success.
Training and managing highly skilled facilities workers around the world, however, can distract from the core businesses of a biopharma company. One way to maximize efficiency and improve facilities regulatory compliance is to outsource facility management to a qualified organization that has already established a reliable presence in the area with personnel who have the breadth of technical capabilities required.
Many leading organizations are seeking best-in-class outsourced services to manage a wide range of technical facilities functions, extending outsourcing even into highly regulated areas. A specialized facilities management vendor can provide equipment maintenance, hazardous waste management, regulatory compliance, environmental and health safety, technology, critical environment, and other specialized functions in R&D and production facilities.
Strategy #4: Prioritize A High-Productivity Work Environment
Workplace productivity depends on the people who work within it — but the workspace itself can go a long way in inspiring them to excel. From fostering collaboration in open discussion areas and providing distraction-free focus in private spaces, to simply increasing the amount of natural light to make a workplace more attractive, the facility itself can be a powerful tool in talent recruitment and retention, which can ultimately trigger greater innovation and drive productivity forward.
In some cases, uncovering underutilized space and better managing overall use can actually provide the cost-reducing benefit of shrinking a facility’s footprint or square-foot-per-employee ratio. The trick is to rethink the corporate approach to space such that it sustains operational efficiency while actually functioning as a “nice place to go to work.”
Strategy #5: Transition Real Estate To Support Biologics
According to BCC Research, the biologics market is estimated to reach $252 billion by 2017. With so much of today’s growth coming from biotech medicines, traditional pharmaceutical manufacturing facilities are quickly becoming industry dinosaurs.
In previous eras, production facilities were fairly adaptable and could be fairly easily transitioned from one type of drug production to another. In contrast, reequipping facilities originally built for small molecule drug production to house biological and biosimilar medicine production is anything but minor. In some instances, a new facility may be the most cost-effective option.
Not only are production processes entirely different, but also the facility management requirements for biological products are necessarily complex, as any changes in environment can affect product quality and safety. To comply with these tougher regulations, expert management of such functions as air filtration, temperature quality, and equipment maintenance to maximize uptime is critical.
Adding It All Up
Taken together, these strategies can maximize value in the corporate real estate portfolio. The tough life sciences regulatory landscape may be pushing the industry in new directions, but with a proactive approach to facility real estate and management, today’s industry paradigm could actually help life sciences companies drive innovation and value.