By Mark R. Smith, Contributing Writer
When assessing COVID-19’s impact on the healthcare industry, start when the pandemic was declared last spring. Consider the problems distributors, suppliers and retailers were having getting personal protective equipment (PPE) to a stunned and anxious public − a issue so severe that offered opportunities for distilleries to craft a side hustle by manufacturing hand sanitizer, for instance.
The genesis of that grand dilemma was outsourcing. While the mass manufacturing of product outside of U.S. borders has long been hailed as a less expensive way to produce health-related chemicals, ingredients, products and technology, the pandemic revealed crippling supply chain issues.
The realization became that, if those companies can’t get products to targeted markets during an international crisis, what’s the benefit of saving money on the process?
While many companies are thus contemplating and conducting reshoring efforts, another segment of the market is working on domestic growth strategies. Research and development companies are struggling to find new flex and light industrial space to facilitate growth; interestingly, the spaces they’re considering might be the same space that companies wanting to relocate back to the U.S. might be scoping out.
Sights on Sites
It will be interesting to see how many companies display heightened interest “in locating facilities in the U.S.,” said Jerry Szatan, principal of Chicago-based Szatan Associates.
“Healthcare likely will be a key industry in the efforts to reshore,” said Szatan. “That does not necessarily mean that the companies that are interested in doing so will all do it now, but will when they’re ready to expand. By that point, there may also be some additional policies to help make that happen, which I presume we’ll see more of after the presidential election and after any potential transition.”
He also feels that, within the medical supply and pharma sectors, some companies will exhibit more urgency to act than others.
“For instance, companies that make a product that can be stockpiled in a warehouse for a couple of years have less incentive to immediately consider moving or expanding domestically,” he said, though Szatan cautioned that some medical equipment and supplies “can only be left on the shelf” for a certain length of time.
Szatan also pointed out that, with the increase in jobs more domestic facilities can bring, training the workforce will be key. “Manufacturing pharma and medical equipment is more complicated than assembling widgets,” Szatan said, “so putting down stakes in a community that can supply an able and educated workforce is crucial.”
After the various challenges of 2020, the involved parties “are seeing that trying to save money by manufacturing product overseas makes no difference when domestic companies and citizens can’t get urgently needed supplies during a worldwide pandemic,” said Chad Sweeney, senior principal for Indianapolis-based Ginovus, who added, “The U.S. is very reliant on China and India for active pharma ingredients, with the vast majority of our supply coming from overseas.”
Concerning just where in the U.S. reshoring operations may look to relocate, Sweeney is seeing a buzz in two markets, due to locational advantages like existing logistics hubs and access to manufacturing talent: the Midwest and New Jersey. That’s “due in part to strong workforces and existing facilities, which are easier to expand than establishing new Greenfield locations.”
As for its medical device clients, Ginovus saw a deferral in demand for their products after the pandemic hit due to the delay of elective surgeries, “but we also expect to see that tick back up during the last quarter of the year as hospitals process the backlog of elective procedures,” Sweeney said.
Bringing more pharma concerns back to the U.S. would fan the flames in the already hot life sciences sector due to “the discovery, development and most recently the manufacturing of new gene and cell therapies,” said Andy Shapiro, managing director for Biggins Lacy Shapiro, in Walnut Creek, California.
Shapiro offered insights by the numbers: There has been “an explosion in gene and cell therapies during the past five years,” he said, with more than 1,000 tissue- and cell-based therapies currently in development, according to the Alliance of Regenerative Medicine.
These new biologic therapies differentiate from traditional approaches; instead of managing a disease, they actually repair the damaged cells.
“So you’re not just treating a patient, you are providing them a cure,” said Shapiro, though that assuredly positive happenstance can actually present an issue in the marketing and accounting departments. “If the therapy is successful,” he said, “the consumer base will eventually disappear.”
That fact raises new issues for the companies competing in the gene and cell space, bestowing a first-mover advantage on those that bring their therapy to market in the most expedient manner. “While the phases of discovery, development and trials have always been critical to the success of a new drug,” Shapiro said, “more recently, the ability to control manufacturing has conferred a real competitive advantage.”
“While many of our clients build pilot plants to produce doses for clinical trials,” he said, “what’s different today is their desire to deploy these facilities in locations that would enable them to ramp up to commercial scale production quickly, should a drug exhibit early promise.”
Thus, the needs of this industry upend the typical site selection process.
“Speed to market often trumps costs; in fact, these can be very expensive locations in which to do business,” he said. “Nonetheless, gene and cell therapy startups strongly prefer to manufacture their new drugs in close proximity to their development operations and in locations featuring an experienced Good Manufacturing Process workforce that is accustomed to functioning in a clean room environment.”
Shapiro said this is happening first and foremost in the Boston/Cambridge, Massachusetts region, on the West Coast, and in and around San Diego and the Bay Area. Another prominent bio manufacturing cluster has developed around North Carolina’s Research Triangle and, to a lesser extent, in northern and central New Jersey and the I-270 Corridor in Maryland’s Montgomery and Frederick counties.
“Emerging clusters,” he said, “can be found in Seattle and Southern California, with those on the cusp in Dallas, Denver, Columbus, Chicago and Indianapolis.”
“When delving into any discussion about the healthcare market,” said Bob Hess, vice chairman of global consulting at the Chicago office of Newmark Knight Frank, “those involved need to discern between healthcare [systems] versus life science verses bioscience, for instance, given the many sectors of the vast market.”
“That’s because some are mature and not that active and some are extremely active and have been successful in the COVID-19 context,” said Hess.
Among those that are not as active include the more traditional markets, like big pharma, which the players “are all rationalizing and thinking about where to invest, like in Big Data,” he said, “as well as some of the hospital systems that are being purchased by other” concerns in that arena.
However, as Shapiro intoned, other participants in the market, such as developers of vaccines, diagnostic devices, therapeutics, biologics and those “advanced pharma ingredients from companies that have been overseas, but after COVID-19 have found that they need to be closer” to the customer base.
“Sourcing is a big deal after the need arose for the extended supply for PPE that we’ve seen in the past [several] months,” Hess said. “It’s about supply chain.”
He also cited the diagnostics submarket. “We just placed a company called GRAIL, a biotech company from Menlo Park, California, in a 200,000-square-foot-manufacturing facility in Durham, North Carolina, because building they were seeking a cost conducive location for expansion − as they eventually planned to scale to 800 employees − along with business climate and business continuity concerns,” said Hess. “The research and development (R&D) operations will stay in California.”
While these are the types of companies that are active now, Hess pointed out that they weren’t around 10 years ago. “But they’ve risen due to Big Data and how that trend has accelerated the transition from R&D to development. It’s a wonderful sector to be in − and they save lives, too,” he said. “These small- and medium-sized companies are a big deal.”
As management at Grail knows, the big driver in the industry “is talent, talent, talent,” Hess said, “and if you’re outside of California, the Research Triangle in North Carolina has it,” noting other hot markets like Baltimore, Boston, Houston Indianapolis and San Diego. “You have to get the location right the first time, due to the expense of moving and building out a facility.”
The other highly active sector today is genomes, where the mapping of the entire human body has led to more opportunities through the creation of so much more data. “Fast, large-scale, low-cost DNA sequencing has propelled genomics into mainstream medicine. Information scale used to be measured in terabytes,” he said. “Now, its petabytes. And the leveraging of Big Data is saving people’s lives.”
As Hess noted, the biotech R&D companies that weren’t around a decade ago have grown to need vastly expanded space in tight commercial real estate markets, said Patricia Larrabee, president of Burtonsville, Maryland-based Facility Logix, one of only a few facility-related consulting services firms in the U.S. that specializes only in the life sciences industry.
“We’re seeing a considerable uptick in demand for manufacturing space, be it flex or industrial. There isn’t enough of it,” Larrabee said, though noting the national trend of building out existing flex spaces with offices for light industrial uses that R&D firms often require.
“The rapid expansion of biotech R&D really just got underway several years ago and has grown to the point where companies need the space as they are moving into the clinical phase of development. Among the many biotech and pharmaceutical companies that need more space as soon as possible are Kite Pharma, a subsidiary of Gilead Sciences; REGENXBIO, a clinical-stage biotech company that focuses on adeno-associate virus (AAV) gene therapy; Cellular Biomedicine Group, which develops proprietary cell therapies for the treatment of cancers and degenerative diseases; and the Swiss multinational pharma Novartis. They represent all facets of the industry.”
And just how much is “more” space? “They need anywhere from 30,000 square feet up to 250,000 square feet or more,” she said. Complicating pinpointing an appropriate location is that COVID-19 has made obtaining supplies and materials—everything from air handling units; lab case work or benches and cabinets, such as biosafety cabinets where sterile work is conducted; and components of the epoxy flooring that is used in almost all bio manufacturing facilities is needed for buildout that much harder.
Also affecting what space is finally selected is whether or not the company has an approved product. “If so, the company might be inclined to buy, rather than lease, and develop its own space,” Larrabee said.
While expansion can happen almost anywhere, as noted any location requires a trained workforce, “as you would find in Montgomery County, Maryland, as well as the nearby cities of Baltimore and Frederick,” she said. “And those workforces need worker training programs that can be found, for instance, at Montgomery College, the Biotechnical Institute of Maryland in Baltimore and at Frederick Community College.”
Having the various components equate to a win is critical, because healthcare “is one of the highest risk industries there is,” Larrabee said. “It can take 15 years and an investment of up to $2 billion to get a drug approved and ready for market; and if you get 80 percent of the way there and the product candidate fails, there’s nothing to show for it.”
So, as often happens, it’s critical for investors to invest in known entities that have a leadership team with a proven track record. “The risk/reward equation needs to factor that in,” she said, “and many executives and investors have chosen to avoid investing in the sector for that reason.”
“If the venture capital firms think that, due to COVID-19, they can move laterally to biotech from other sectors to chase after what they perceive as high activity, that will be a challenge,” said Larrabee, “because you need to thoroughly know any sector before making such a huge investment.”
Jared Loos, CEO of the Philadelphia-based architectural and engineering firm EwingCole, agreed with Larrabee. “There has been a boom in science and tech, notably in the biopharma sector, right along the Route 270 Corridor in Montgomery County.
Loos noted some more recent changes in how architectural firms work with clients. “Historically, our firm worked primarily with the client directly rather than the commercial real estate (CRE) firm during the planning phase,” he said, “but in recent years, we’ve gotten more and more involved on the CRE side. When we bought Gaudreau, of Baltimore, a few years ago it helped us to service the CRE side even better.”
Noting that EwingCole has a presence in healthcare hotspots such as New York, Pittsburgh, Charlotte and Raleigh on the East Coast, with a West Coast presence in San Diego and Irvine, California, Loos also talked about the importance of locating in markets with a solid workforce.
“Biotech companies come in all shapes and sizes,” he said. “The first issue was smaller companies finding space they could afford and grow in that wanted 15,000 square feet or less, but also wanted to be able to grow in place. And know that these are R&D spaces that have to be outfitted for proper floor and ceiling heights to accommodate specialized duct work, piping and equipment heights for specialized equipment and air changes. And there are a finite number of existing buildings that can meet that need.”
What companies are seeking in these cases, as Loos said, greatly vary. “Pharma was hot, but much of that manufacturing had been outsourced offshore. However, after the supply chain difficulties with COVID-19, I think we’ll see that change, with considerable boosts from incentive packages at a state and federal level.
Biotech is today’s wave “because it’s an evolving industry with cell and gene therapies, and connects the crossover of healthcare with science and technology,” Loos said.
Not surprisingly, equipment and consumables for biotech is also a solid market, but know that lead times, generally speaking, “are getting longer,” he said. “The partial explanation for that issue is that some products are manufactured offshore, but also the uptick in demand due to COVID-19 and federal supply chains being first in line.”
What’s next? Loos said to look for more synergies and collaborations between healthcare institutions and science and tech firms, in research and clinical trials.
“That can only lead to more demand for space on the market. It’s all about the supply chain, employees, access to research, everything,” he said. “The aforementioned clusters have all built on themselves; those parts that make the whole feed on each other.” Χ
Bio: Odenton, Maryland-based Mark R. Smith joined Expansion Solutions after having written about site selection among the vast number of topics he has covered in the business universe. That part of his career began in 1993 when he joined The Daily Record, a Baltimore business and legal publication, where he delved into the worlds of economic development and commercial real estate, among numerous other industries; in 2003, he was named editor-in-chief of The Business Monthly, another Maryland publication that covers the scene in the Baltimore-Washington Corridor counties.
Concurrently, he’s written at length about the film and video industry for a variety of publications, and about his other loves, including music, sports and leisure.