Danger Ahead: What Biotech Companies Need To Know About Leasing Space

One of the most significant moves for a growing biotech or pharmaceutical company — sometimes considered as a graduation step — is the acquisition of property to conduct clinical trials and manufacture commercial products. The cost of such an acquisition is the single largest expense item on a biotech company’s books and the largest aspect its board of directors must underwrite. In the first installment of this two-part series, we will explore what considerations companies need to make before they decide what type of property to pursue.

Some in our industry focus on process and regulatory affairs and leave these seemingly mundane topics to others. This is primarily because the science and technology and the race to get the product into clinical trials blurs this crucial transaction. Some view the acquisition of property as a “necessary evil,” as it involves dealing with lawyers, insurers, property sales personnel, and folks primarily in the land business, all of whom have no background in or understanding of the biopharmaceutical market. Others, however, get caught up in the excitement of having their own manufacturing facility. Herein lies the problem: The biopharma manufacturer needs to make sure it goes into this early mode of property acquisition properly armed with the necessary knowledge and it is thoroughly prepared for the dangerous road ahead.

Buy Vs. Lease Vs. CMO

Small or new biotechs generally grow out of a state-funded or university-funded incubator and often look for land for their company to expand in the same locale as their founders. While they must hold their R&D and intellectual property (IP) close to their employees, they are quickly faced with the dilemma of which way to turn:

• Buying fallow property, developing and building on it, and creating a permanent location is a common approach for a large pharma company. While this is the most expensive route initially on paper, if handled by a property management and capital engineering group, most sites can become an efficient use of space and capital. Most small biotechs are not prepared to buy, develop, and build a facility, due to the initial cash outlay, particularly as hiring the best R&D staff is their priority and key to their growth. In addition, most boards of directors see land purchase as risky, because they have no recourse for a failure, slowdown, or retreat if the product plans do not come to immediate fruition.
• “Manufacturing Site For Sale” can be an email scam or another seemingly logical choice for the startup. The heavy lifting of facility design and construction might have been taken care of by someone else, and those who worked at the site might be willing to join the startup, further streamlining the growth process. The initial capital outlay covering the purchase, re-engineering, and renovation can be daunting and time consuming. This approach can be used for fully functional licensed facilities or for renovations of older buildings. Due diligence up front is the key to succeeding in this path.
• Engaging a CMO is an easy approach from a risk standpoint. The biotech firm would have the CMO build the necessary suites within its facilities or use an existing suite, acquire the process technology, acquire the process equipment, and begin the effort of qualification and validation. All the pre-production batches, stability batches, and trial material production will be executed by the CMO’s operators and staff. The entire effort will be less costly than buying land and developing it, and hiring an operating and quality staff, but the time for the technology transfer will take typically a year longer (or more) than if it was done internally. The longer-term prospects of keeping the work at the CMO become very costly and exceed any leased property arrangement. The last key aspect is that the product and process technology knowledge base becomes resident at the CMO, and the biotech firm does not expand on its own knowledge equity. This can also delay the product introduction, due to process problems along the way, as the biotech has not developed the necessary key strengths internally in problem-solving and production.
• Entering into a leasing arrangement is the easiest middle ground between the buy and the CMO options. It minimizes the biotech organization’s initial cash flow and provides for an exit strategy if needed.

A leased facility is an ideal approach? Maybe, but often it’s not. Let the buyer beware!

What Is The Biotech Operating Company’s Objective?

As a basic starting point, the biotech company needs to understand its processes, product portfolio, and business case from all aspects. This should include:

• Facility needs for the process and its production scale
• Equipment (laboratory and support equipment in addition to process equipment)
• Warehousing needs (cold rooms, segregation, restricted access, even to the building owner)

Within the context of the lease, the property to be leased must provide for the architectural layout and the HVAC and critical GMP utilities to support the lab and the production. In this type of agreement, it could be beneficial to create a facility user requirements specification (URS) capturing what is expected.

What Is The Building Owner’s Objective?

The building owner’s objective is to get the biotech firm to take the lease for as long as it can, for the most money, while providing them with the least in capital upgrades, services, and guarantees. Time is really the main driver here, as while biotech companies are looking for space, the building owners are creating, leasing, and re-leasing properties at a fast pace.

Building owners and the sales staff will often minimize a biotech’s requirement or offer “above market” tenant improvement (TI) cash incentives directly proportional to their inability to meet the requirements. Often $500,000 to $1 million is offered to compensate, often for several million dollars long term. Unless the biotech firm has a keen understanding of the engineering of a facility, the “generous” TIs are just excellent bait to get them to sign on the dotted line.

The dark side of a building owner is the hope that the biotech firm that leased their property will develop their property into a more functional and attractive capability for future client leasing. This will often be built into the landlord’s financial model. In the end, the building owners win on both ends of the transaction.

Biotech Leasing Space

One of the biggest misnomers in the biotech property world is the concept of “biotech space.” Unless a firm finds an abandoned biotech company’s actual facility for lease, the leasing space is whatever the property salespeople call it when they are selling it. Today, leasing space sold to a biotech firm can range from former commercial office space to a former warehouse to an actual chemical “wet lab.” The following are key considerations a biotech firm must address when operating in this murky industry and its dealings.

The most important aspect that a biotech firm must document and articulate to a potential building owner is a master plan or conceptual design developed by an engineering firm. This must list and provide the requirements and quantities for the facility, its layout, and the utilities and support systems.

A key ingredient in the conceptual design is the regulatory environment to which it is to be compliant. It is critical that the laboratories are compliant with the FDA’s GLPs. From a safety standpoint, the labs must understand the cells, organisms, and blood products they will handle and comply with NIH design guides and the CDC BSL-1 to BSL-3 safety guidelines. In addition, each municipality has its own registration policy and requirements for inspection and sampling of the drains.

As to the production environment, even for clinical trials, the facility should be compliant with both FDA cGMPs and EU regulations in order for the products to be universally acceptable for any submission. The EU requires additional airlocks and therefore additional floor space beyond what is commonly needed for the FDA, all of which must be incorporated and designed in.

Summary

In the end, biotech firms looking for leased space need to be wary and assure that the leased space meets their requirements. Design tools like a URS or concept report can set clear expectations on both sides. This documentation and evaluation of the building by an engineer needs to be done before signing the lease. Never be swayed by promises and gaudy interiors. In our next installment, we will look at the key technical aspects of any property.

About The Authors:

Herman Bozenhardt has 43 years of experience in pharmaceutical, biotechnology, and medical device manufacturing, engineering, and compliance. He is a recognized expert in the area of aseptic filling facilities and systems and has extensive experience in the manufacture of therapeutic biologicals and vaccines. His current consulting work focuses on the areas of aseptic systems, biological manufacturing, and automation/computer systems. He has a B.S. in chemical engineering and an M.S. in system engineering, both from the Polytechnic Institute of Brooklyn. He can be reached via email at hermanbozenhardt@gmail.com and on LinkedIn.

Erich Bozenhardt, PE, is the process manager for IPS-Integrated Project Services’ process group in Raleigh, NC. He has 13 years of experience in the biotechnology and aseptic processing business and has led several biological manufacturing projects, including cell therapies, mammalian cell culture, and novel delivery systems. He has a B.S. in chemical engineering and an MBA, both from the University of Delaware. He can be reached at via email at ebozenhardt@ipsdb.com and on LinkedIn.