New Biopharma Growth on the Horizon: Does Location Matter?

Roger Humphrey

Following the “gloom and doom” of the patent cliff, 2014 has been a refreshing year. Replacing the focus on patent expirations, depleted product pipelines and uncertainty in U.S. healthcare reform, 2014 brought a noticeable resurgence of economic activity and positive growth to the life sciences industry. In particular, small to medium-sized companies and specialty players are steadily growing and driving much of the activity in the marketplace as the source of most new product innovation today.

As this growth plays out in the marketplace, a competition for resources, talent and markets is beginning to heat up, begging the question: does location matter where biopharma product commercialization is concerned?

In a word, yes. Global trends are re-shaping the traditional markets for biopharmaceutical talent and the physical footprints of the facilities that companies occupy. While there’s no single definition of a ‘good’ location, companies must balance the need for access to resources against the cost of doing business in a particular city, market or region. Understanding where—and why—companies are choosing to invest in their operations reveals important trends for the future of the biopharmaceuticals industry.

JLL’s 2014 Global Life Sciences Cluster Report points to the cities and regions that are winning the biopharma competition and becoming leading “clusters” of life sciences talent, innovation, facilities, institutions and resources. Here’s a deeper dive into how location is playing a role in biopharmaceutical industry and shaping trends for the year ahead:

Q. Big Pharma companies remain squarely focused on cost-cutting. How has location played a role in their search for greater efficiencies? 

A: As the patent cliff approached, global pharmaceutical companies acted quickly to become more nimble through consolidation, reducing their facilities footprints through building sales and decommissioning and trimming labor costs through large-scale layoffs. Corporate real estate portfolios have taken a hit.

In the United States, for example, most of the larger companies have consolidated their operations, leaving significant facility vacancies, including some large headquarter campuses. As this contraction hit such cities as San Diego, Minneapolis and Philadelphia, savvy developers and economic development agencies stepped in to retrofit vacant corporate facilities for use by multiple tenants, with more incubator-style flexible spaces and shared laboratory services that appeal to growing mid-tier and specialty biopharma companies. This approach has been highly successful in mature life science clusters like San Diego, Boston, Montreal, Cambridge, and Basel.  

Now, new growth for Big Pharma is coming in the form of strategic acquisitions. They are looking to shift their global footprints in search of lower costs and to tap new markets. As they scan the horizon for talent and opportunity, new regions are climbing to the top of their lists.

Q. Looking globally, where are new growth opportunities emerging for biopharma companies?

A: Europe and the United States remain leading life science clusters of talent, research institutions and investment capital, as multi-national corporations continue to maintain a presence in key markets like Boston and Zurich.

But the tide is shifting. JLL research shows that more than one-third of life sciences companies anticipate reducing or consolidating their real estate portfolios in North American and European markets. At the same time, 63 percent plan to expand their footprint in China and 48 percent in Brazil.  

The shift is not purely about manufacturing or distribution savings. More importantly, these markets are quickly becoming hot beds for industry talent and innovation. Analyzing year-over-year Patent Cooperation Treaty (PCT) applications—a key benchmark for innovation—reveals that North America and Europe have seen application volume drop, although they remain leaders. Meanwhile, overall PCT applications are on the rise in Asia and Latin America. In fact, the Asian region has already surpassed both North America and Europe in total applications for all technology classes. China, for example, reported a 42.8 percent increase in applications in 2014, and Japan also recorded significant year-over-year growth.

Science and engineering doctorate degrees are also increasing rapidly in developing countries. Developed countries such as the Netherlands, South Korea and Australia have outpaced the United States, which is expected to lose some more of its post-graduate education lead as Baby Boomers retire. And China now leads the world in bachelors of science and engineering degrees, even though it educates a much smaller percentage of its population than most other large countries.

Emerging clusters in Asia are actively building innovation cities and incubator centers to provide a supportive growth environment for both expanding corporations and start-up firms, in hopes of capturing a bigger slice of the market.

Q. What can the movements of smaller and mid-size biopharma companies—which largely lead industry innovation today—tell us about future growth in the United States?

A:Increasingly, start-ups, specialty firms and mid-tier companies are establishing themselves as leaders in new product development, driving IPOs reminiscent of the early dot-com boom. The United States saw 52 life sciences companies complete IPOs on U.S. exchanges in 2013, raising $7 billion, according to G. Steven Burrill data. That is a significant jump from 2012 when 16 life sciences companies went public, raising $1.1 billion.

U.S. market clusters with a high concentration of these companies flourished last year, as demand heated up for new office, R&D and production space. Boston remains the top city in the world for industry start-ups, thanks to its robust venture capital environment and U.S. National Institutes of Health funding. San Diego and the San Francisco Bay Area sit alongside Boston as the top three U.S. cities for biopharma companies in the coming years, buoyed by a combination of leading research institutions, high funding levels and mature venture capital investor groups, along with supportive local economies that appeal to start-ups and mid-size companies.

We will also see more innovation continuing to emerge from abroad. The industry's story will continue to be re-written by rapidly growing smaller players and developing countries hungry to foster innovation. As their imprint deepens, it will be critical for companies to carefully evaluate the most advantageous locations for future growth.

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