Making the Most Out of Your Real Estate

May 02, 2016

Karen WilliamsonThe current market pressures on the global pharmaceutical sector are well documented. Changes to healthcare policy, regulation, demand and the patent cliff have increased opportunities for generic production, which is now on the rise.

Second to R&D, real estate and facilities make up the most substantial costs for pharma companies and industry leaders are now looking at how those assets can be used to respond to market pressures.

Pharma is adapting, with the divestment in non-core activities and restructuring proving a popular tactic. At the same time, industry leaders are looking at ways to create more productive R&D processes while driving down costs. These strategies should be complimented with proper consideration of real estate to maximize their value through careful planning and clever design.

You’ve got the assets. Use them.

Large pharmaceutical companies often own significant amounts of office real estate as well as more specialized assets such as laboratories and manufacturing facilities that can be used to raise capital.  AstraZeneca, for example, disposed of Alderley Park in Manchester as part of the decision to establish a new R&D centre and corporate headquarters in Cambridge, UK in 2016.  

As companies look to raise capital to fund core areas of the business, selling and then leasing back real estate is a tempting option and one that other industries are utilizing. Corporate disposals of owned real estate peaked at a seven year high in 2015, totalling over €15 billion. There are a range of solutions including sale and leasebacks, and other structured vehicles that can be used to release working capital as well as deliver other objectives such as driving change in corporate culture and workplace behaviours. 

However, the recently announced changes to lease accounting standards may prove to be the “fly in the ointment” when it comes to sale and leasebacks. From 2019, all leases will effectively be treated as on balance sheet. These changes could mean that sale and leasebacks will no longer be as financially advantageous for businesses and so the next two and a half years present an opportunity for property owners to still be able to fully maximise gains and secure favourable accounting treatment ahead of the changes.

Making the most from M&A

Companies are also using M&A as a means of strengthening and restructuring core business areas to cope with the changing market. The merger between Shire and Baxalta announced in January, is testament to this.

Without properly considering the real estate aspect in an M&A deal, businesses open themselves up to a wide range of risks. They can find themselves taking on long lease terms, property that is worth less than stated, and can run up capital costs due to contractor agreements or having to upgrade properties to meet the operational needs of staff following the transaction.

As well as mitigating risks, the implementation of a considered real estate strategy can add significant value to any M&A deal. A merger is also a good opportunity to rationalize real estate operations which can include co-location options for incoming employees as well as improving the use of current workspaces. According to the Head of Global Real Estate in a leading pharmaceutical group, “The speed of integration post-merger can be a critical driver of deal value – real estate can definitely facilitate this.”

Common following a major acquisition are problems surrounding talent retention and the cultural differences of the two companies. Well-designed office space can help avoid these issues and avoid a segregated working environment allowing faster integration – often crucial to any merger’s success. Commenting on the merger process, a Director of a leading pharmaceutical group commented “The human dimension must never be dissociated from the real estate aspect. The real estate consultant has great value, as he/she can help the company build a work environment which meets both financial and human requirements.”

Boosting innovation through clever real estate design        

Crucial to countering the rise of generics has been the move to design more creative drugs with an emphasis placed on biopharma.

To satisfy the demand for producing advanced drugs, pharma companies should naturally be investing in state-of-the-art facilities and lab equipment but traditional lab structures can also be modified to boost innovation. Pharma companies are modifying traditional lab configurations to provide more options for teamwork and collaboration. Biogen has made the transition toward open floorplan design to meet the preferences of millennial workers in its office portfolio. The space is focused on collaboration and improving the wellbeing of employees.

Lab tenants are turning to more “hoteling” style build-outs that have removable partitions, adjustable lab elements and plug-and-play features that can quickly meet the needs of the work at hand.

 “Big Pharma” has also looked at ways to embrace more open innovation.  The Stevenage Bioscience Catalyst was created to bring academia, biotech and pharma companies together to drive advances in healthcare research more effectively. The Bioscience Catalyst opened in 2012 and is co-located with GSK’s UK R&D facility and provides both “Incubator” and “Accelerator” spaces comprising laboratory, office and networking space.

This new 'incubator plus' model, characterized by co-location with GSK and access to a range of expertise and technical services, is focused on high-quality, IP-based tenants. In late 2014 the Cell Therapy Catapult announced it had chosen to deliver a cutting edge Cell Therapy Manufacturing Centre within the Bioscience Catalyst campus. This will provide a facility for Bioscience businesses to manufacture late stage trial and commercial advanced therapeutic medicinal products.

The creation of incubators and innovation hubs has since moved up the agenda of pharma companies. There are a number of Pharma companies considering open innovation through opening incubators, joint labs, and crowdsourcing initiatives to source innovation from outside the company in London and the South East of the UK.

The race for more innovative drugs also means pharma companies have to increasingly attract specialists from a limited labour pool. Companies therefore face stiff competition in recruiting the best talent, but real estate can help. Having facilities near universities is a good first step in attracting specialized staff as is a well-designed work-space which can go some way in drawing talent. Companies should also consider offering amenities onsite as well as childcare facilities.

Conclusion

Pharma companies are feeling the pressure of a changing market and are rightly adapting. As senior leadership increasingly recognise the value that real estate can bring to the broader corporate agenda, pharma companies need to think about how an effective real estate strategy can benefit the wider business. 

 

Karen Williamson is Associate Director, JLL (http://www.jll.co.uk/united-kingdom/en-gb)

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