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Is Big Pharma’s Patent Cliff A Launchpad Or Fall-Off For Lab Real Estate?

Life sciences real estate has clung to signs of resurgence in recent quarters, including a small uptick in venture capital funding and the thus far unanswered hope for interest rate reductions.

But there’s still faith in one potential savior: Big Pharma’s patent cliff, expected to create a surge of investment in mergers and acquisitions.  

The patent cliff, when blockbuster drugs lose patent protection and generic alternatives take market share, will eat into profits for all large global pharmaceutical firms. Yet it will also give them plenty of reasons to invest in mergers and acquisitions to pick up promising new treatments to fill their pipelines. And this rush of investment could turn into “a perfect storm” for M&A, according to JLL.

The longstanding question, especially for developers bringing lab space online during a supply glut, is how much a wave of M&A activity will impact the lab real estate market and how long it will take to start eating away at the roughly 14.8% national lab vacancy rate.

Alexandria Real Estate Equities' 15 Necco St. development in Boston, which will be the home of Eli Lilly's $700M research center.

M&A activity in biotech is 40% higher than the historical average, according to the Pharma M&A Index compiled by GlobalData, the highest it has been since the index was started in 2016. With the supply of lab research and development space in major markets roughly five times that of demand, according to recent JLL research, developers and landlords are hoping for any activity that eventually translates into leasing. 

Record revenue losses due to expired patents are coming over the next five years, JLL Research Director Mark Bruso said.

This “huge exposure” — $59B in lost revenue in 2025, another $50B in both 2026 and 2027, followed by $70B in 2028 — is expected to spur acquisition activity by Big Pharma as it looks to build up a pipeline of potential moneymakers to get ahead of the revenue loss. Bruso said they will be “on a hunt for IP,” searching for promising potential cures and therapies, and will have recently divested assets to channel more money into acquisitions.

Historically, there has been a connection between patent cliffs and industry growth. The last big cliff, which began in 2010, was followed by a decade of relatively steady growth in biotech and lab real estate

JLL research suggests this activity will bolster but not boost the real estate market. The brokerage looked at the last five years of such acquisitions and determined that roughly 75% of M&A targets had kept the same amount of real estate, with a small sliver adding space and the remainder reducing their footprint. These mergers can create larger firms that require more R&D and lab space, but that isn't always the case.

“Big Pharma has tremendous firepower to get deals done,” Bruso said. “Generally, it’s a good story, but it’s not a great story.” 

Bruso said the funding will be a “net positive story for the commercial real estate market,” in part due to its fragile state. Despite positive signs early in the year, some of that enthusiasm has been dampened by the prolonged interest rate situation, with cuts likely delayed until later in the year. In a tight funding environment with declining initial public offerings this year after a promising start, M&A funding will keep startups afloat and prevent the market from getting worse.

The connection between acquisitions and real estate can vary, Newmark Head of National Life Science Research Elizabeth Berthelette said. M&A can result in consolidation, but there are also examples where M&A activity brings in firms with new technology and new lab requirements, which turns into new real estate requirements and expanded leasing. 

“It depends,” Berthelette said. “If you have companies that are expanding their portfolio and looking at companies that are doing different sciences or developing different drugs, there could be a need for new requirements coming out of this.”

Recent data and financial performance suggest Big Pharma will have plenty of money to spend on building up its pipeline. There has been a record level of $1B-plus M&A biotech deals in 2024, according to research from Stifel, with 26 expected if the pace holds.

U.S. biotech stock prices have surged 23% this year, while Big Pharma spent 10.7% more on R&D last year than it did the year prior. Savills found that nearly 300 pharmaceutical firms are spending at least $100M on R&D this year, which, combined with M&A spending, should add significantly to the sector’s funding. 

However, any positive impact this investment may have is expected to fortify the positions of incumbent markets. Bruso sees the coming wave of patent cliff-fueled M&A activity focused on the big three markets in and around San Diego, Boston and San Francisco.

Other markets that don’t command as much federal funding or lack the density of researchers won’t have as many merger targets and will likely suffer. These three markets also have several new and forthcoming megacampus sites, which has attracted new development interest from firms including Eli Lilly and Moderna

“The most pain will be felt in the secondary and tertiary markets,” Bruso said. “There are going to be projects that sit vacant for a number of years. It’ll be a tough next 12 to 24 months.”