The Life Sciences industry is unique in a number of critical respects. First, it is a highly diverse sector, with products and applications ranging from agri-business to medical devices and instrumentation to therapeutics and diagnostics to drug discovery R & D and clinical testing. Second and equally unique, life sciences companies come in a variety of sizes, from the fledgling biotech start-up with only a handful of researchers to the ubiquitous big pharma operation, typically a multi-national corporation employing thousands of investigators and technicians worldwide. Third, depending on the relative maturity of a given bioscience company, its business model may embody only research or product development or manufacturing or, particularly in the case of a major pharmaceutical, all of the above.
Accordingly, it is difficult to concisely categorize the general characteristics of this business sector, much less establish a single set of criteria useful to a company considering expansion or relocation. Each organization has its own particular needs. Nevertheless, what can be said with confidence is that the sector is growing at a brisk pace. According to the U.S. Department of Labor, in the coming decade employment in the life sciences industry is projected to grow at an annual rate 13% above the national average. For the life sciences, it is not a question of whether growth will occur, but rather, where that growth will be most vigorous and profitable.
Of course, on the most fundamental level, life sciences companies seek many of the same qualities every other industry values when considering expansion or relocation: a favorable business climate, supportive tax policy, realistic regulatory oversight, a well-educated workforce, robust infrastructure, access to capital, reasonable development costs and an efficient transportation system. In addition, there are a host of less tangible qualities that have become increasingly important to any corporate relocation strategy, not least of which is a region’s overall quality of life including access to responsive healthcare, a respected primary and secondary education system and a locale’s potential for recreation and cultural enrichment.
That said, what distinguishes the life sciences sector from other businesses in terms of site selection is the industry’s tendency to congregate in well-defined geographic clusters. In its most recent ranking of life sciences clusters, the Milken Institute identifies the country’s ten top biotechnology areas in order of their resources, potential for innovation and prospects for growth (“America’s Biotech and Life Science Clusters, June, 2004”). Topping the list is San Diego, followed closely by Boston, Raleigh-Durham-Chapel Hill, San Jose and Seattle.
The Mature Life Sciences Cluster
Each of these mature life sciences clusters possesses characteristics that make it fertile ground for nurturing biotechnology, the most important feature being the presence of one or more significant research institutions: either a tier one research university, an institute for advanced study or a major medical center. Such institutions supply the life sciences sector with its most sought-after commodity: ready intellectual capital in the form of top-flight Ph.D. level researchers, technicians and administrators.
Interestingly, the human resources offered by a major university are not limited solely to the traditional biological sciences. Because of the highly diverse requirements of the life sciences sector, there is also strong demand for specialized expertise in engineering, bioinformatics, computing, statistical analysis, health and nutrition, agriculture, the social sciences and business administration. Most prominent biotechnology clusters are anchored by more than one, broadly-based academic institution that can supply the necessary intellectual muscle in a variety of scholarly fields.
Moreover, an academic research community is the locus for new ideas that form the basis of innovation throughout the life sciences sector. Frequently, university-sponsored research attracts federal funding that can spur the development of new procedures and products that have yet to cross the threshold of commercial viability. A life sciences company set in the midst of such a thriving cluster benefits, both from the direct contributions of publicly-funded research and the residual reward of access to a pool of highly skilled researchers who may be called upon to serve as industry consultants, as collaborators or increasingly, as full business partners in new biotech ventures. Indeed, most prominent research universities have instituted aggressive programs of technology transfer, intended to expedite the commercialization of promising scientific advances discovered within their laboratories.
Additional Benefits of a Mature Life Sciences Cluster
The advantages of a mature life sciences cluster extend well beyond its academic resources. A multitude of ancillary services available in an established life sciences community make significant contributions to the viability of the cluster. For example, most early stage biotech companies place every available investment dollar into their programs of research and development, leaving few remaining resources for facilities or other comparable capital improvements. Such companies have a tremendous need for wet laboratory space that can be leased for limited time periods at competitive terms tailored to their particular cash-flow situations. Many research parks, and more recently private developers, have responded by developing low cost incubator laboratories that feature short-term leases with highly favorable terms, at times forsaking hard cash in exchange for an equity position in the intellectual property that results from the company’s research.
Further along the drug development pipeline, biotech and pharmaceutical companies need access to pre-clinical animal testing facilities and ultimately, settings for actual human trials. Again, a mature life sciences cluster offers a host of resources to address these needs. In the early stages of drug development, the presence of contract vivarium and animal testing facilities provides essential drug development services that can be purchased on an outsourced basis, reducing a company’s up-front capital costs. The same can be said for access to specialty laboratory space where the properties of particularly toxic or infectious biological agents can be studied in rigorously controlled laboratory environments, known as BioSafety Level (BSL 3 or higher) laboratories. Such labs are enormously expensive to build, maintain and operate. In a mature cluster, there is potential for the short term, shared-use of these labs, sponsored either by a regional university or a consortium of companies, thereby spreading construction and operating costs among many users, again reducing the magnitude of an individual company’s capital investment.
At the opposite end of the drug development process, Contract Research Organizations (CROs) and Contract Manufacturing Organizations (CMOs) are located either within, or in proximity to a mature life sciences cluster. A drug developer will contract a CRO to establish an accountable framework for clinical trials, essential to FDA approval. The CRO provides the researchers, the testing methodology, the clinical subjects, and the statistical analysis and documentation necessary for a successful drug trial, sparing the developing company the expense of ramping up these labor-intensive activities in-house.
During this clinical testing phase, the presence of a major medical center or teaching hospital is also an invaluable asset, providing a diverse pool of patients whose particular illnesses may benefit most from the latest developments in medical research. This is especially true for healthcare facilities with acute trauma centers or specialized intensive care units, where a new drug discovery in clinical trials may be the only “treatment of last resort” for a critically ill patient.
Contract Pharmaceutical Manufacturers fill an equally valuable niche within the mature life sciences cluster. Once a drug achieves FDA approval, a CMO can step in to produce the targeted medication in commercial quantities, first refining the production process through the use of a pilot plant or small scale manufacturing facility and then proceeding on to large-scale manufacturing.
Emerging and Niche Clusters
Given the inherent advantages of an established life sciences community, it would seem imprudent for a biotech company to place itself anywhere but inside one of the country’s seven or eight mature clusters. Still, a number of early stage life science companies do find enormous value implementing relocation strategies elsewhere, in what is best termed an “emerging” life sciences cluster.
In an emerging cluster, the competition for skilled researchers is far less intense than that found in a more developed cluster. This factor alone suggests the potential for better employee retention, greater staff stability and lower overall employment costs. Land values in an emerging cluster should also be more reasonable than those of a mature cluster, as are many other costs associated with the drug development process. Further, an emerging cluster may be able to muster venture capital funding, economic development incentives and tax credits more readily than a well-established cluster. Even if the magnitude of a region’s economic inducements are smaller, so too is the pool of companies seeking assistance. Again, less competition translates into greater opportunity.
In addition, an emerging cluster that has expertise in a specialized niche of the life sciences may be a particularly good fit for a similarly-minded biotech company. In the Midwest for example, Iowa State University has a strong tradition of agricultural research and USDA support, making it an ideal niche for ag-related life science companies. Similarly, the University of Wisconsin has expertise in food and nutrition, while Ohio State University is developing homebred research in the areas of bioinformatics and personalized medicine. Each of these regional areas, though not routinely cited among the nation’s most prominent life sciences clusters, still offers compelling advantages to those biotech companies in need of their particular expertise.
A Well Educated and Diverse Workforce
Beyond the obvious scientific capabilities of a region, a number of other key factors can influence decisions regarding a life sciences relocation strategy. One is the general standard of education within a region, irrespective of its institutions of higher learning. A biotech company has need for employees who encompass a wide range of educational experience. For example, while a representative pharmaceutical manufacturer may have up to 10% of its staff with post-graduate degrees, on average, 25% of its employees need no more than a high school diploma and a year of specialized education, either in a community college system or through on-the-job training. The remaining staff positions are generally filled by employees holding either associate or undergraduate degrees. Accordingly, regions that boast excellent educational systems across the board, from high school to community college to public and private universities, are better equipped to offer a life sciences company the kind of diverse, well trained workforce that is tailored to its specific needs.
At a recent biotech roundtable in Research Triangle Park, an investment banker from Morgan Stanley was asked to identify the single most important factor in predicting the success of a life science company. His unsurprising answer: “the strength of the management team.” This business truism is particularly apt in the life sciences industry. The path from petri dish to profitable drug is a difficult one, and while this process may begin in the hands of a PhD. biologist, the realization of a new drug’s commercial potential is most often the direct consequence of sound business practices and entrepreneurial skill. Even a region without a recognized scientific community, but one which nevertheless possesses proven business acumen, may be a good candidate for a life sciences company, particularly if its management team must be built from the ground up.
When compared with traditional “smokestack” industries, the life sciences sector places relatively modest demands on a region’s utility infrastructure. The sector does require significant amounts of water, especially if the business is engaged in manufacturing. A typical research lab may consume up to 30,000 gallons of water per day. A large scale manufacturing operation might need three to five times that amount. Most often, problems arise not on the supply side, but in a given community’s capacity to treat downstream effluent. Before settling on a specific site selection, companies should accurately project their water resource requirements and assess that need in comparison to a locale’s wastewater processing capability.
In terms of electricity, life sciences companies value power reliability and quality over sheer capacity. Given the tremendous monetary value of even small quantities of drug product, any disruption of electrical service to a bio-manufacturing facility can be financially catastrophic. This is especially true if a serious, weather-related event or other disaster prevents the timely refueling of a plant’s on site emergency generators. In this respect, sites that draw power from two independent substations, or better still, completely separate power grids, have an inherent advantage in terms of their anticipated reliability.
The products created by life sciences companies are relatively small. There is rarely need for access to deepwater ports or rail lines. What is valued is proximity to a major airport, especially one with direct national and international connections. Reasonable access to the interstate highway system is also important, particularly on the manufacturing side of the sector.
Regional Economic Development
In 2001, only fourteen states offered economic inducements and tax incentives specifically targeting the life sciences industry. Today, more than forty states have such programs in place. If inducements are essential to a company’s business plan, virtually every region in the country is prepared to pony up in varying degrees. And while development funding may not be the primary determinant in a company’s relocation strategy, the magnitude of a region’s menu of economic incentives may well tip the scale in its favor. As with every prudent business decision, comparison shopping is the rule.
By and large, life science is considered a “clean” industry, with only modest emissions of relatively innocuous compounds. Still, many companies do work with a host of exotic biological and chemical products that can be infectious or toxic, even in very small quantities. Understandably, government agencies responsible for maintaining local water and air quality standards closely regulate the pre-treatment and emission of such agents. Some states, most notably California, have implemented increasingly stringent standards for emissions from laboratories and manufacturing facilities which can pose significant costs to a biotech company, both in terms of actual capital investment and the soft costs associated with negotiating the approval process. In general, local regulatory agencies that are well versed in the particular needs of the life sciences industry present a more responsive and predictable path to regulatory approval.
Most biotech companies possess intellectual property that is highly proprietary in the commercial marketplace. In addition, many companies are pursuing government sponsored, classified research programs related to national defense, homeland security and bioterrorism. Both circumstances demand that a prospective site be readily secured. Sites that are too prominent or too easily accessed will incur higher development costs, both for perimeter security barriers and the personnel necessary to monitor these boundaries.
A further consideration related to security may be the presence of community-based, political and social activists who oppose a given development proposal on the basis of its environmental impact or the perceived ethical propriety of its operations. This is especially worrisome for companies engaged in procedures that involve the use of laboratory animals for preclinical testing. The prospect of such activism will influence the extent to which a company must address the security of its property and personnel. It may, in addition, suggest the need for greater expenditures in areas of community relations, outreach and public education.
In summary, the criteria for expansion, relocation and site selection in the life sciences are as diverse as the industry itself. An important first step is a careful assessment of a company’s critical site related requirements and then doing the homework necessary to ensure that the ultimate decision truly offers the best strategic fit.