Big Chunk Of $300B In Biotech M&A This Year Will Be Upfront Capital For Expansion
A wave of investment from large pharmaceutical companies into life sciences startups via mergers and acquisitions could result in a flood of demand in the lab real estate market for the next 18 months.
During the first half of this year, a series of multibillion-dollar deals — Pfizer’s $43B acquisition of Seagen, a biotech focused on “revolutionizing cancer care,” Merck’s $11B acquisition of Prometheus Biosciences, and Astellas Pharma’s $5.9B pickup of Iveric Bio — has already pushed total deal volume past last year’s pace.
A significant chunk of that total deal value will be upfront capital for expansion, he said, and another portion will be bonuses for long-term performance, back-end rewards the industry refers to as biobucks. For comparison, Cushman & Wakefield estimated that venture capital investment in life sciences in 2022 totaled $35.8B, with just $1.4B worth of initial public offering activity.
There is still significant venture capital money sitting on the sidelines, but it is unclear when that will be deployed, making M&A activity all the more important to keeping startups running and leasing space.
Since traditional VC spending is down in an uncertain market, startup valuations have shrunk, giving Big Pharma bargain prices for acquisitions, McCready said. Many new technologies that emerged and matured during the pandemic have had time to prove themselves. Big Pharma, which has an estimated $1.4T war chest, also faces what is known as the patent cliff, with large companies’ exclusivity on blockbuster drugs set to expire by the end of the decade, pushing them to search for potential replacements they can rush to the market. The industry faces an estimated $160B revenue shortage between now and 2028, according to Dan Belldegrun, CEO and co-founder of Breakthrough Properties, a multibillion-dollar fund investing in life sciences real estate.
All of that is accelerating the search for M&A candidates and driving more spending on startups, which could, in turn, quickly add more money for investment in lab real estate. Landlords are very interested in this activity, McCready said, because numerous new developments are expected to deliver between 2023 and 2025, especially in Boston, San Diego and South San Francisco. Physical expansion is needed to fill the 40M SF of new lab construction in the pipeline nationally.
There are two scenarios for how M&A activity could impact life sciences and lab real estate: immediate cash infusions from Big Pharma driving these startups to expand and lease more labs, or integration into larger pharma companies that limits long-term growth for these firms or leads to no net new real estate growth.
McCready said the former is more likely since many of the targets of Big Pharma M&A, scouted and picked for promising clinical results, will be some of the most promising prospective tenants for lab landlords.
“Since these companies are in a preclinical or clinical operation, there’s still room for them to grow, and the likelihood is they will need to take on additional real estate, both for future lab operations and future manufacturing operations,” he said. “Some sort of growth will occur as a result of this M&A funding. There will be a need for net new real estate to accommodate these acquired companies’ individual growth, or there will be a need for strategic planning and facilities management and associated services to incorporate these companies into large firms.”
It may even bolster the market for biomanufacturing space. Recent deals to expand manufacturing capacity suggest these firms may be gearing up to rush products to the market.
The spike in this kind of activity started during the second half of 2022 after what appeared to be the peak of public venture capital investment in biotech in late 2021. There was $250B in M&A in biotech and medtech in 2022, per research from data firm Clarivate, and only 35 IPOs in these fields that year. There have also been extensive partnering deals within the space: 65 worth over a billion dollars in biobucks.
“They've clearly found their alternate capital source, partnering to keep those pipelines moving,” said Matt Gardner, leader of CBRE's advisory life sciences practice. “And the pipeline's massive right now, so it's an expensive proposition to keep it moving.”
Belldegrun said the vast majority of firms that are acquired will subsequently expand their real estate. Firms like Eli Lilly will be funding more of their own research and development spaces going forward, and their investments will mean that midstage startups will get the money they need to expand.
He only cautioned that many of the growth plans established in these mergers play out over years, meaning the impact may not be as sudden as some would hope.
But overall, the significant investment being made in companies with promising clinical trials is a good sign.
“It’s good news for the industry to see that science is driving results,” Belldegrun said.
Post-merger acquisition also introduces lots of variables for Big Pharma in acquiring talent and the potential to open up new offices in new markets or rearrange existing lab use, he said.
Gardner said he is less optimistic that increased M&A activity will lead to a huge overall increase in real estate absorption. For one, there is a big variety of outcomes when firms are acquired.
“Turns out, there’s no typical post-merger integration process. It’s extremely varied,” Gardner said. “I couldn’t tell you there’s a one-size-fits-all answer for the real estate implications of these deals.”
There are also big implications in the industrywide struggles of smaller-growth companies in this environment, which have been pushed to increase their runways and cut costs. Venture valuations have taken a 50% to 60% haircut, and Gardner said he is seeing smaller companies make less aggressive growth plans in reaction. This also means that midsized firms that may have overcommitted to headquarters in the past and then subleased space will rightsize their real estate, ultimately slowing down absorption in the short term.
“A smaller part of the industry is under pressure,” Gardner said. “They're looking for alternate capital. And they're also, therefore, making less aggressive burn decisions. It’s all about the burn rate.”
Caution is the prevailing sentiment, Gardner said. Growth-stage firms that haven’t gone public are thinking about alternatives to save money and commit less, which may slow down pre-leasing, which has already become more sluggish in recent months. That would mean new developments take longer to fill, increasing the risk of additional vacancies and spurring developers to potentially put new projects on hold.
“There is a lag in the system in terms of time between funding and real estate decisions,” McCready said. “Landlords are going to need to start seeing data that suggests pre-leasing activity is on the rise.”
But a big part of these Big Pharma acquisitions is about acquiring the talent and teams that can lead to bigger and better cures, Belldegrun said. Supporting and funding cutting-edge science is a long-term upside for the industry.
“The long-term perspective is there will be a lot more demand for space,” he said.