The Shifting Geography Of Life Sciences Innovation

By Richard McBlaine, international director and Bob Bovee, accounts director, Jones Lang LaSalle

The life sciences industry is experiencing change at a pace that is forcing companies to examine how they should operate and innovate more effectively. For many, the solution may involve a change of scenery. Increasingly, life sciences companies in North America are investing in locations that help contain costs while boosting access to innovation.

Facing the patent cliff and the intense price competition that comes with it, life sciences companies foresee an industrywide loss of revenue to the tune of $110 billion or more between 2012 and 2016, according to Accenture’s 2012 report, “Beyond the Patent Cliff – Sign of Recovery in Biopharma’s New Normal.” Recognizing that the traditional product development model no longer ensures success, companies have turned to mergers and acquisitions, licensing, and other business strategies to keep their pipelines full and to mitigate risk.

Life sciences companies don’t need to be reminded that continuous innovation is central to their success. Innovation requires the ability to attract top talent and great academic partners and to build modern, up-todate facilities. Concurrently, companies need to find more cost-effective ways to operate without diminishing the quality of their processes or products.

One way companies are aiming to meet both goals — innovation and cost containment — is by reshuffling and right-sizing their North American facilities. After the cost of new drug development, facility and real estate costs are among life sciences companies’ highest expenses.

Real estate is also important when it comes to reprioritizing. As M&A activity results in excess or duplicative facilities in established clusters, companies are concurrently motivated to expand into lower-cost metropolitan areas.

A move Toward Smaller Cities
In its most recent Global Life Sciences Cluster Report, Jones Lang LaSalle reveals that in the United States, life sciences companies are shifting more operations than ever before to cities where occupancy and workforce costs may be lower and where academic communities can offer fresh perspectives that may lead to a big payday down the road. As a result, smaller metropolitan areas with good academic and workforce characteristics are gaining influence in the life sciences community.

The Jones Lang LaSalle Life Sciences Global Cluster Report ranks global life sciences clusters according to weighted scores for total employment in high-tech research and hospital/medical fields, life sciences establishments, NIH funding, and venture capital funding. The top 10 U.S. clusters list represents “established clusters.” The report also covers emerging clusters including Chicago, Denver, Atlanta, central/southern Florida, and Indianapolis. New emerging clusters added to the 21-city ranking since the 2011 report include Westchester/New Haven, OH; Salt Lake City; Dallas/Fort Worth; Wisconsin; and Michigan.

The report’s results reinforce three key trends in life sciences business growth:

1. Smaller metro areas are gaining influence from larger markets. Boston remains the clear worldwide leader for life sciences business, but the rising stars over the past year have been San Diego, Raleigh-Durham, and Philadelphia, all of which moved into the top five rankings for the first time. Larger cities such as New York, Los Angeles, Chicago, and San Francisco remain important centers but have not kept pace with the smaller cities in the same regions.

   This trend can be seen further down the list as well. Minneapolis-St. Paul, Denver, central/southern Florida, and Indianapolis all saw gains in life sciences business and are in contention for companies with expansion plans. Lower occupancy costs are one factor in attracting companies to Minneapolis instead of Chicago, or to Philadelphia over nearby New York, for example.

2. Proximity to innovation is more important than ever.

   Although the industry increasingly looks to emerging markets globally for growth opportunities, much of the core R&D work will remain in the United States. It is also apparent that life sciences companies are becoming more strategic in their site selection, choosing locations with rich industry resources, investment capital, and human talent, all of which add up to a higher propensity for discovery and innovation.

   The mature clusters in the United States and Europe continue to be reliable choices, with deep and well-developed resources. But smaller markets in the United States and Canada are working feverishly to bolster their industry infrastructure.

3. Economic development efforts and public-private partnerships are increasing. Recognizing that the life sciences sector has a bright future for U.S. job growth, city and state governments are positioning themselves to capture their share of that growth.

   Clusters such as Westchester/New Haven, central and south Florida, Indianapolis, and Montreal offer targeted incentive packages and new state-of-the-art incubator centers and parks designed to serve the sector. Beyond incentives, clusters highlight the quality of their research institutions with governmentinstituted regulations and protections.

The global innovation stage
Canadian markets are trending similarly to emerging clusters in the United States as cities like Montreal and Toronto offer solutions and incentives competitive with those in up-and-coming U.S. markets.

And in Latin America, clusters are acting quickly to meet the demands of local populations with increasing wealth and access to healthcare. As the demand for drugs and medical care increases, manufacturing operations in Latin America are beginning to produce not only for North American customers, but also for domestic populations.

At the global level, emerging clusters in China, Brazil, India, and Singapore have reported recent funding opportunities dedicated to the life sciences industry. Nearly all of these markets have reported increased spending on overall public healthcare as well. Although many aim to ramp up the innovation potential of homegrown start-ups, multinational companies also have an opportunity to capitalize on these offerings. Despite the increase in global competition, however, there is little doubt that core research and development will continue to take place in North American clusters.

As life sciences organizations enter this new market phase, the ability to execute on facilities and real estate strategies takes on greater importance. Success often lies in choosing the right locations, assembling the best possible incentive packages, or divesting excess properties after an M&A deal. Understanding the characteristics of life sciences property markets is an important step in these times of transition.