Microsoft powerpoint - cbre_viewpoint_pharma_final.171109.ppt

Global ViewPoint
Global Research and Consultingwww.cbre.eu/research THE PHARMACEUTICAL SECTOR:
REAL ESTATE IMPLICATIONS OF INDUSTRY-WIDE CHANGE
Nick Compton, Head of Life Sciences, Global Corporate Services, EMEA INTRODUCTION
As a truly global consumer of the widest range of property asset types and the most expensive buildings, the
pharmaceutical sector is of significant importance to the real estate industry. The sector faces wide ranging structural
challenges that wil lead to unprecedented levels of portfolio activity in the coming years in both mature and emerging
markets. This report aims to highlight these challenges, identify the approaches industry is adopting to address them,
and provide some commentary on the likely implications for real estate.
To help validate assumptions and provide depth to our analysis, CB Richard Ellis (CBRE) undertook a benchmarking survey with the leading companies in the sector. We invited real estate leaders in each of the top ten global pharmaceutical companies to participate in a questionnaire based survey, focused on the issues facing the industry. The results indicate strong potential for changes within the industry to generate a range of real estate activity in the coming years. OVERVIEW
CBRE’s survey of key industry decision makers ƒ Manufacturing overcapacity in mature economies, demonstrates that the top ten global pharmaceutical coupled with growth in lower cost economies, will lead (pharma) companies occupy at least 430m sq ft of to ongoing closures and dispositions. Some sites wil be office, manufacturing and specialist research space sold to contract manufacturing organisations (CMOs) around the world, of which approximately 75% is owned - one of the highest ownership ratios of any corporate sector. ƒ R&D optimisation wil lead to the opening of established research sites to external parties and the Significant change is already being seen and is likely to acquisition of facilities in established open innovation accelerate as companies address the challenges of maintaining product pipelines, and improving both margins and return on investment. Our survey shows The survey endorses our experience that shareholders the immediate and ongoing impact on real estate as and business leaders in the pharma sector expect rapid companies respond through increased M&A activity, advancement of these activities. This is leading to a partnering and collaboration, and by seeking to change in both the organisational structure of internal optimise both the location of business activities and real estate teams and their relationship with global real The key real estate trends illustrated by our survey include: ƒ Significant levels of post-merger real estate consolidation; firstly with offices followed by R&D and manufacturing space ƒ Increased monetisation of owned assets; again led by the office portfolios but also likely to include specialist assets SECTOR CHALLENGES
When we see pharma companies participating in the Although technological breakthroughs such as high property market, this is usual y a response to a long throughput screening and the new research methods chain of events that started as an attempt to address developed by the biotechnology sector have the challenges facing the industry, as well as their delivered efficiency improvements to the drug discovery process, the costs of maintaining a new product pipeline has continued to increase. At the same time, the largest customers for drugs – The 20 year period of exclusivity that a patent State/Federal healthcare agencies that ultimately pay provides is typically consumed by ten years of for or subsidise prescriptions – have become much development before a product receives regulatory more aggressively focused on getting value for approval and sales can commence. Before turning money and cutting budgets as they address the a profit, the revenue generated for the remaining period of the patent must recoup both the costs of development and manufacturing and also the costs It is expected that the pressure on margins from of the numerous other potential products that wil higher development costs and reduced healthcare have inevitably failed during the earlier stages of budgets wil continue and pharma companies wil development. At patent expiry, the producer loses its step up cost reduction/containment strategies to exclusivity and the drug becomes a generic counteract this effect, including an increase in the commodity that can be manufactured by generic use of contract research and contract manufacturing specialists that have no drug discovery pipeline to fund and operate a minimum cost/low margin business model.
SECTOR TRENDS – RESPONSE TO INDUSTRY
As widely reported in the press, in the next five years CHALLENGES
The sector is addressing the challenges it faces with approximately €90bn (US$135bn) in annual revenues from patent expiries. In 2010, this wil include many global blockbusters including for example Lipitor, which currently generates c. M&A activity in recent decades has occurred via several well-spaced steps, starting with the creation of AstraZeneca, GlaxoSmithKline and Sanofi-Aventis in the mid to late 90s; followed by Pfizer’s Historically pharma companies have been able to acquisition frenzy in the early 2000s (absorbing maintain a pipeline of new products that have come Upjohn, Pharmacia and Warner Lambert); and the to the market in time to replace revenue lost from recent period characterised by piecemeal strategic patent expiries. This is no longer the case, as a acquisitions, including Roche’s acquisition of combination of late-stage new product failures and Genentech and the mega-mergers of Merck with poor returns from R&D spend have reduced the Schering Plough and Pfizer with Wyeth.
number of high revenue generating products due to come to market.
The mergers of the early 2000s have not generally delivered the lasting solution that was hoped for at Pharma companies have responded to pipeline the time and in some cases margin performance has deficiencies by developing partnerships with been weaker post-merger. It is clear though that key younger, more entrepreneurial companies, agreeing lessons have been learnt from earlier acquisitions licensing deals with the owners of IP (intellectual and subsequent restructuring that have dictated a property) and by significant levels of M&A activity. different approach for the current crop of mergers. At the same time, internal R&D models are being It is expected that the merged organisations will be reviewed and changed to improve return on brought together much more rapidly this time round with consolidation being accelerated, particularly amongst the predominantly office based sales and marketing/administrative functions. Merging R&D and manufacturing remains a complex challenge that demands a more measured and careful approach; but in many cases the merger will act as a catalyst for the wholesale reorganisations of these functions that has been ongoing in the pre-merged entities.
Rather than advocating the mega-merger, some top IMPLICATIONS FOR REAL ESTATE
ten companies have approached the need to fill the These sector challenges will have a direct impact on product pipeline through a series of much smaller the global property market and addressing these acquisitions of younger, smaller biotechnology challenges will be demanding; requiring CRE companies, which, in addition to securing IP, has leadership to be proactive and prepared, ensuring exposed these companies to a different, more agile advanced planning and financial capability. operating and product development model, and a different approach to property.
The first wave of activity during the next 12 months will see the consolidation of office accommodation Many pharma companies can trace their history as post-merged entities drive efficiency savings back to the early part of the 20th century – and through the least complex part of their business, many still occupy sites that were acquired decades eliminating the numerous duplicated sales and ago or during the early years of their existence. administration offices that wil be present in most Some of these sites evolved to become all-purpose campuses containing manufacturing, R&D, sales, marketing and administration functions. It is common to find that these individual functions are We may also see the sector accelerating the operating in locations that are sub-optimal for their deployment of space efficiency initiatives that are particular needs, although the costs and disruption well established in other sectors, such as global of a move have often prevented a viable relocation.
workplace standards and alternative work programming.
It is certainly true that companies created during the biotechnology boom in the late 90s have chosen markedly different locations than those established At the same time the high proportion of owned by the pharma companies. The pharma sector is assets that are typical of mature pharma companies beginning to gravitate towards these more optimal may be monetised either through sale and leaseback or vacant sale – 80% of our respondents confirmed that they are considering or already The pressure to reduce cost and improve margins, undertaking monetisation projects for generic assets and the desire to improve returns from R&D, (offices, warehouses etc). This will free up funds to amongst many other factors, have driven the trend help offset merger costs and pay down debt. Initially to move different functions to locations that are this is most likely to be generic office space but we may see specialist assets (such as laboratories and production plant), and perhaps whole campuses Location Preferences by Function, Nov 2009
being monetised via the same routes or through joint ventures. Few respondents thought that specialist assets would be considered for monetisation, while this perhaps Generally moving to locations with a fair confirms the view that the benefits of ownership for balance of low cost, technical capability this asset type are still worth more than the cash that and reliable utilities. Robust could potentially be released, it probably also points demographics, favourable tax and to a lack of demand for specialised assets from the availability of local incentives are also mainstream investment market. This may change as the number of landlords that understand the Favour established R&D clusters that dynamics of specialist assets increases. show strong success criteria, such as; existence of a skilled workforce, Manufacturing Disposals/Relocation: presence of other R&D entities, Post M&A re-structuring will lead to over-capacity of established science networks, active manufacturing and the closure of surplus sites. Closures will be predominantly in mature markets in opportunities to collaborate with Europe and North America – a small number of academic/institutional research entities. such sites will continue in use either by being acquired by other companies in the sector, by CMOs Sales & Moving to mainstream office locations that wil continue production under contract or be converted to manufacture different non-pharma government entities, international products. The majority will be sold and redeveloped Successful Disposal Routes for Manufacturing
For R&D, the trend that favours locations that Sites (04-09)
facilitate open innovation and collaboration with third parties as opposed to the more traditional closed single occupier sites will accelerate. Pharma companies are already making use of science/ innovation park environments either directly by acquiring space for their own occupation or indirectly by the purchase of smaller biotechnology Ranked Criteria for R&D Location Optimisation
Criteria for R&D Location Optimisation 80% of respondents confirmed that whilst their Availability of/ability to attract skilled labour manufacturing capacity was not in optimal locations, the huge cost and timescales associated with these Effective scientific networks/infrastructure assets presented a significant challenge to overcome before a relocation can be undertaken.
Ranked Criteria for Manufacturing Location
Optimisation
Skilled labour / availability to attract skilled labour Presence of robust legislation / regulation Given the huge cost of laboratory buildings and associated specialist facilities, pharma companies will also continue to look to remodel existing closed campuses to encourage third party occupation –making an expensive move unnecessary and effectively converting these sites to science parks. For smaller enterprises in the sector these parks may provide access to specialist facilities, scientific services and other amenities that they could not An increasing proportion of pharma products will be otherwise afford and are often not available at more manufactured in lower cost economies such as Eastern Europe, India and China, accelerating a trend already started by the big generic Preferred Medium to Long Term R&D Strategy
manufacturers. The scale-up process from laboratory to mass production (making use of pilot plants) and some smaller scale highly complex manufacturing will remain in mature economies. State drug regulations may also necessitate retaining Turn single occupier Close single occupier located science parks to co-located science ABOUT CBRE LIFE SCIENCES GROUP
Our survey firmly illustrated a desire for a more CB Richard Ellis' Life Sciences Group provide advice centralised, fully mandated real estate team in order specifically tailored for occupiers of life sciences to facilitate the demanding program of change and related commercial real estate who are seeking to escalate the importance of real estate within these maximise the value from property expenditure.
companies. Most respondents admitted to not having an established real estate component to their We are staffed throughout the major life science M&A process and many had a strong view that real regions in the United States and Europe. Our people estate was not sufficiently catered for when pay attention to the local, regional and global bioscience environment and anticipate how these business and economic drivers will affect your business as well as how facilities and real estate THE FUTURE
decisions support your business objectives. We are passionate about solving the unique real estate ƒ High levels of disposition activity in mainstream challenges faced by life science firms.
office locations globallyƒ Increasing levels of monetisation of generic assets in mature/developed markets FOR FURTHER INFORMATION
ƒ Selective monetisation of specialist assets where Senior DirectorGlobal Corporate Services ƒ Creation of JVs of large campuses in some ƒ Significant levels of manufacturing site dispositions ƒ Increasing levels of demand for manufacturing capacity and sites in emerging markets/low cost Nick has over 20 years’ experience working with multi-national corporates, investors and the public sector. In particular his expertise extends across the ƒ Transfer of sites via business sales and outsourcing global pharmaceutical sector, providing advice to the full spectrum of the industry from global ƒ Increasing use of specialist R&D environments such pharmaceutical clients to UK public sector organisations. In recent years Nick has been ƒ Creation of open, multi-occupied science parks involved in the creation of new R&D environments from existing closed single occupier campuses including leading the creation of the Harwell Science and Innovation Campus and Colworth Park Joint Ventures as wel as the monetisation of specialist assets such as manufacturing plant, laboratories and infrastructure.
Darcy Mackay Senior Managing DirectorGlobal Corporate Services CBRE Consulting, USAt: + 1 415 772 0249e: darcy.mackay@cbre.com Darcy leads the Global Corporate Services consulting practice in North America, specialising in corporate strategic planning, organisational change and design, and portfolio optimisation for both private and public sector clients. She has extensive experience advising Pharmaceutical sector corporates, such as Pfizer and Merck, on technical

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