Philly's About To See How Durable Its Gene And Cell Therapy Boom Really Is
Tumult in the global economy is forcing commercial real estate companies of every stripe to reassess plans for an environment in which raising money is much more expensive.
For Philadelphia, in the early stages of what it hopes is a prolonged development boom for life sciences, that is complicating a crucial time for keeping its momentum going.
Several significant life sciences developments are under construction in Philadelphia, and a parade of big-name developers with deep experience in the life sciences meccas of the Boston, San Diego and San Francisco Bay Area markets have announced plans for what would represent the next wave.
But the millions of square feet worth of tenant requirements cited to justify new development in Philly are somewhat at the mercy of the financing environment for biotech. And that has deteriorated severely this year.
Philadelphia life sciences companies raised almost $1B in venture capital in 2021, but were on pace to collectively raise less than $800M this year after three months, according to CBRE data.
Companies whose therapies show promise are still finding deals, like local SwanBio Therapeutics’ $56M Series B that closed in May. Yet even SwanBio CEO Tom Anderson acknowledged the fundraising environment has turned “bearish” in comments to the Philadelphia Business Journal. Less than two months later, the Federal Reserve has raised its benchmark interest rate first by 50 basis points, then another 75.
“If rates continue to climb, it’ll certainly make for a more challenging environment, and some companies may reconfigure how they do business,” said Tenant Risk Assessment CEO Brad Tisdahl, whose consulting clients include life sciences-focused landlords in the industry’s gateway markets.
“If I’m the CFO, I’m probably doing work right now on a company’s capital budgets for 2023, and I might be looking into 2024 and 2025, because the Fed has signaled that it will continue to tighten up monetary policy. So I’m preparing for the future to be an even more expensive environment for development.”
Nearly 1M SF of new construction in the life sciences sector is set to deliver in University City this year alone. Speculative construction is ongoing in both UCity and the Philadelphia Navy Yard, finally delivering new supply to two submarkets that have been effectively fully occupied for the past couple of years, as multiple sources characterized the market in conversations with Bisnow.
While most of the square footage at the two most imminent deliveries, One uCity Square and 3.0 University Place, has already been leased up, the pool of potential tenants for the remainder and for future projects looks less eager than it did a few months ago.
“We have seen that there are still lots of tenants in the market today, but a lot of them have pressed pause in terms of making decisions,” Longfellow Real Estate Partners Managing Director of Research Lauren Gilchrist told Bisnow. “They still exist, they still want space or will want it at a point in time, but we don’t know quite what it means yet.”
Veteran office developer Keystone Development + Investment had to develop its own thesis for evaluating potential tenants at The Curtis, the former publishing plant and headquarters in Old City it is gradually converting to life sciences uses.
Keystone has benefited from getting both lab and manufacturing space online to meet the demonstrated demand ahead of any ground-up construction in the city. But the tenant pool looks very different from office: Neither of its direct, research-based tenants, gene therapy startup Aro Biotherapeutics and cell therapy company Imvax, have therapies in the commercialization stage yet; Imvax’s glioblastoma treatment in Phase 2 clinical trials is the closest. Keystone’s other two life sciences tenants are research tech company Vivodyne and incubator BioLabs.
Confidence in company leadership is Keystone’s first consideration in picking tenants, Keystone regional director Jamie Rash told Bisnow, with Aro and Imvax both led by industry veterans. Both also have already completed significant fundraising rounds.
“Knowing they’ll have a war chest to last a period of time” is the next-most-important characteristic for a potential tenant, Rash said. “Capital raising is key.”
Keystone also values tenants with build-out requirements that aren’t too specialized. Anything too idiosyncratic requires additional security in the lease terms to compensate, Rash said.
“We know a lot of these companies don’t last, but we do know there’s a really strong demand for second-generation lab space, which is why there’s no vacancy in the market,” he said.
Though Gilchrist is a veteran of the local real estate scene, Longfellow is the most recent national developer to announce its intent to build a ground-up life sciences project in the city, a $365M combination of lab and biomanufacturing space on the University of Pennsylvania’s Pennovation Works campus.
That partnership is a reflection of what the national life sciences industry considers Philly’s greatest strength: academic institutions that are proven generators of talent, research ideas and startups. In addition to spinning out some of Philly’s most successful life sciences startups, UPenn, Drexel University, Children’s Hospital of Philadelphia and Thomas Jefferson University are directly and indirectly involved in billions of dollars worth of healthcare and life sciences development.
But in order for Philadelphia to deliver an unprecedented amount of new development and create the mature life sciences industry required to absorb it, it will need more startups to ascend the heights that, so far, only Spark Therapeutics reached when it was acquired by Roche for $4.8B in 2019.
Short of that, Philly’s gene therapy and cell therapy startups will need to reach the commercialization phase for their therapies and the revenue-producing stage for their companies — and do it in the next few years, regardless of how difficult the economy is.
“Around the Boston area, we have a huge VC community, and they’ve been around the block; they know how often things fail,” said Derek Lowe, a drug discovery chemist and author of industry blog In the Pipeline.
“But if you try to get a biomedical research thing going elsewhere, investors may not have quite internalized how crazy this stuff is. And if you get an unexpected result or failure, investors may panic and pull out. You need to make a psychological adjustment to be in this industry, and that applies to everyone up to me at the bench.”
Philly’s biggest research breakthroughs have been in the related yet distinct fields of gene therapy and cell therapy, a growing industry everywhere but one in which the city’s institutions took an early lead.
As a pair of young fields, the long-term viability and safety of gene and cell therapy are still called into question when individual therapies have concerning trial results. Local company Amicus Therapeutics cut its gene therapy department in February after a double whammy of a failed SPAC merger and bad news from the Food and Drug Administration for one of its therapy candidates. It has now opted to focus on providing more supportive technologies as a quicker path to revenue.
Most therapy candidates that have advanced farthest in the FDA approval process are for diseases rare and serious enough to have less stringent standards applied.
The next frontier, one that observers have varying levels of optimism for reaching, is to create therapies for more common diseases, and they do so at a much lower price point than what gene and cell therapy cost today. In venture capital funding for biotech companies, investors will often be drawn to therapies that target the biggest potential patient populations, Tisdahl said.
“We’re at the next tranche of the development process where we have to figure out how to make [gene and cell therapy] affordable,” said contract development and manufacturing organization LucasPye Bio founder and CEO Tia Lyles-Williams. “Each round of treatment for some of these [therapies] is $500K to $1M each. Working people can’t afford that.”
Lowe believes insurance companies would be willing to cover much of the cost for therapies that provide alternatives to subsidizing an otherwise untreatable patient’s disability and palliative care for years. Still, he and Lyles-Williams agree gene and cell therapy represent fields that are riskier than general biotech as the basis for an entire city’s life sciences industry.
“I’ve been preaching from the beginning that gene and cell therapy [represent] a very, very small percentage of the biopharma industry,” Lyles-Williams said. “I can imagine investors thinking that it may be the wave, or they may be like me and think, ‘This is a long path that might not ultimately be fruitful.’”
CORRECTION, JUNE 24, 10:15 A.M. ET: A previous version of this article misstated the price Roche paid to acquire Spark Therapeutics in 2019. This article has been updated.