EMBRACING CHANGE IN AN INNOVATIVE, YET CHALLENGING ENVIRONMENT2016

LIFE SCIENCES

2

EMBRACING CHANGE

KEY TAKEAWAYS

The life sciences sector remains in a state of transition, ever evolving and innovative, faced with both exciting market prospects yet often constrained by regulation. The way forward for the sector is clear: stakeholders must look for ways to decrease costs, given the consensus that the current upward trajectory is unsustainable.

Despite this there remains a growing list of challenges that continue to shape the industry - driving occupiers to revisit real estate strategies to best position operations, mitigate risk and capitalise on market opportunities.

• Pursuit for innovation & growth

• Coping with competition and specialisation

• Preserving and building stakeholder value

• Complying to the ever changing regulatory andrisk environment

• A push for greater market transparency

• Consideration of markets of the future

• How best to manage the talent agenda

• Re-evaluation and consideration of existing/newbusiness models

AGING POPULATION

REFORMS

ACCESS

POPULATION GROWTH

ECONOMIC AND

POLITICAL UNCERTAINTY

LENGTHENING LIFE

EXPECTANCY

PRICE AND VALUE BASED

CARE

RISING WEALTH

COST PRESSURES

INCREASE IN CHRONIC DISEASES

KEY CONSTRAINTS

KEY DRIVERS

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The life sciences sector remains in a state of transition, ever evolving and innovative

THE MARKET BACKDROP

Following years of where M&A came to the fore the life sciences sector continues in its transitional mode. Falling returns on the production of mainstream drugs and the stagnation of more mature markets, coupled with the potential opportunities of new emerging economies and the sheer size of their immediate marketplaces has shifted focus to real estate strategies.

The workplace is often the key success factor and occupiers continue to make buildings work harder for them, increasing density ratios, streamlining production and supply chains, and are quickly adopting smarter working initiatives.

Corporates continue to embrace innovative environmentsCompanies are continuously looking for ways to increase their new product pipelines, stimulate innovation, and increase revenue streams.

Generic drug use is up and loss of revenue from expired patents and R&D has been on the decline.

Compliance with regulation and managing riskPharmaceutical companies are being pushed to strategically adapt to the ever changing regulatory environment.

The regulatory and risk environments are becoming very complex and vigorous and are motivated by patient health, safety, and protection, pressurising product delivery and associated supply chains.

Market transparency There is a need for transparency in product commercialisation, manufacturing processes and clinical trial quality. Drug and device safety standards are tightening due to social media and affiliate marketing programs. Meanwhile, digitisation, EMR’s, network medical devices, and cloud and data sharing have increased the risk for cyber-attacks with companies struggling to enforce intellectual property (IP) at a global level. In addition complex and outsourced supply chains need to be managed securely.

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Planning for the “next wave”There is rising pressure to provide real-world evidence of positive patient outcomes, value pricing, reimbursements, market access, and marketing. There are new stakeholders that will have greater influence and require a more collaborative customer model that involves all of the critical decision makers. At the same time, a more personalised method of product development and delivery is changing healthcare decision making and delivery with location strategy remaining ever critical to success.

As growth slows in developed markets, many companies are already seeking the next emerging markets primed for higher returns in the future. Emerging markets, while possessing a number of risks do offer significant opportunity and corporates are seeking

to balance risk and rewards of locating within markets in return securing premises in close proximity to the next wave of consumer demand.

But what are the realities for real estate?While we are witnessing rising interest in emerging markets, more mature markets still remain attractive. This is particularly the case where infrastructure, market access and accessibility of talent is strong. This is already placing pressure on supply volumes with modern grade A space in high demand yet limited supply in established markets leading to higher rental growth and more limited opportunities for occupiers in the near term.

While grade B refurbishments are one route to supply, build-to suit-schemes within prime locations remain the most attractive option

for many, aligning closely to established sources of education to facilitate and secure the talent of tomorrow. This is particularly the case for larger life science companies where requirements remain attractive to investors and developers considering speculative development, although securing occupation in this nature tends to come at a significantly higher cost to the occupier.

SUBSTANTIAL PRESSURE ON M&A ACTIVITY,IS IT SUSTAINABLE?

INCREASING VISABILITY, HOW DO CORPORATES COPE WITH THE DEMANDS OF A MORE TRANSPARENT MARKETPLACE?

TALENT ACCESSIBILITY REMAINS A KEY CHALLENGE,WHAT ARE THE SOLUTIONS?

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1996

Deal Value ($bn)

$84bn

$565bn

1998 2000 2002 2004 2006 2008 2010 2012 2014

M&A IN HIGH DEMAND AS CORPORATES STRIVE TO ACHIEVE EFFICIENCY WHILE MAINTAINING INNOVATION LEVELS

Despite suffering a sharp sell-off in the early months of 2016, global healthcare companies’ appetite for M&A appears far from over. Headline grabbing deals continue despite healthcare and biotech stocks suffering extreme volatility at the start of the year, usually perceived to be a deterrent to any deal making decision.

It has been suggested that the correction at play in the stock market is more of an opportunity than anything else for many large healthcare companies with market liquidity high, cash available and valuations suddenly becoming more attractive.

M&A volumes achieve new heights in 2015 The combination of challenging economic conditions and shifting sector dynamics led to a surge in M&A deals during 2015. Healthcare was one of the most targeted industry for mergers globally with approximately $565 billion worth of transactions completing last year, up 29% on $436.4 billion in 2014 and the highest annual level on record (figures exclude the c.$160 billion Pfizer/Allergan transaction).

In a year where M&A activity increased globally as a whole the technology sector was the only sector to outperform healthcare with a total of $713.2 billion worth of deals completing — according to the latest data from Dealogic.

But what are the main drivers behind the desire for M&A? • The rebuilding of drug

portfolios and disposing of non-core operations.

• Mitigating the expected costpressures from governmentsand insurers and strive forimprovement in overalloperational efficiency.

• The need for productspecialisation in an evercompetitive market place.

• Or even, tax inversion - notdriven by customers, products,market share, sales, orrevenues.

While megadeals have been headline grabbing, the majority of mergers have been at a smaller scale and are more targeted transactions aimed at boosting growth in core businesses or offloading unwanted assets as drug makers review existing portfolios and identify assets that might be a better fit for a rival.

While M&A volumes secured new heights last year the collapse of Pfizer’s $160 billion proposed merger with Allergan in April 2016 brought the total value of abandoned deals this year to its highest since the eve of the financial crisis sending shockwaves through corporate America. The value of all business sector deals withdrawn so far total $376 billion — the highest since 2007 by deal value, when $405.9 billion worth of transactions were scuppered, according to Dealogic. The proposed Pfizer-Allergan megamerger - if completed was anticipated to be representative

of the second largest M&A deal on record and the largest healthcare M&A deal globally of all time.

Be it megamerger or not the reshuffling of assets among global corporates is clear and signals a shift away from the era of sprawling big pharma groups competing across the full range of drug categories. Instead, companies are having to make tough choices about the markets in which they can — and also importantly cannot — succeed in.

The push for focus is encouraged by investors who want the industry to think harder about how it allocates capital after a long period of sluggish growth where returns on investment in research and development by the biggest drug makers have been hit by falling sales and increasing costs.

Will M&A demand result in a further raft of megamergers?While we anticipate that high-profile deals will continue to be announced we do expect a step change in approach to transactions. We may see a pause in the announcement of record-breaking buyouts, with many of the best assets already taken. Finding good deals at an affordable price is inevitably getting harder.

This could increase the attractiveness of asset swaps in which both parties have an interest in agreeing sensible valuations as business lines are realigned to focus on organizational strengths and efficiency.

HEALTHCARE M&A VOLUMES REACH NEW HEIGHTS

Source: Dealogic

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BUT HOW ARE THESE TRENDS ACTUALLY IMPACTING LIFE SCIENCE OPERATORS?

In this continuously changing landscape life science operators are having to adopt to the challenges at play with real estate high on the list for strategic portfolio review.

Carrying substantial costs, existing portfolios are being addressed in line with business agendas which are being revisited to consider access to talent and future growth markets within the industry. But how are operators reacting to industry change in an increasingly competitive market governed by the need for more innovative working practices?

Key themes of strategic reviews• The sensitive economic backdrop remains with

national health agencies drive for austerity remaining a primary factor underpinning real estate strategy.

• Brexit and its potential implications on R&D, innovation and talent accessibility, regulation and supply chain efficiency.

• Advances in technology are creating change from the way products are developed and manufactured, to the locations where these activities take place. The knock on effect, is greater focus on real estate planning by life sciences companies which is creating an avenue for specialist third party investors to seek a stake in the industry.

• Generic drug companies do not demand large lab space, as they do not develop new drugs. Thus generics have more impact on the office market than on labs, as these companies put emphasis on manufacturing, commercialisation and marketing.

• A shift by pharmaceutical companies to exit owning generic assets such as offices and warehouses through sale and leasebacks.

STEP CHANGE IN APPROACH TO LOCATION

Newly built “innovation cities” and incubator-type facilities have and continue to emerge, claiming dominance over rapidly growing life-science clusters.

Massive research parks in those emerging global clusters support growth in R&D and attract global biopharmaceutical operations, domestic and international talents. Meanwhile, rising construction costs globally are continuing to impact those seeking to locate within core life science hubs. With traditionally large volumes of space needed by big pharma operators for labs and R&D this could prompt occupiers to rent rather than own in key locations adding to competition levels among generic drug producers which tend to gravitate towards core markets and require less space for R&D.

STEP CHANGE IN APPROACH TO BUSINESS MODELS

Due to concerns surrounding rising costs and wide variations in performance and quality indicators, stakeholders are pushing for a transition to outcome – or value-based care (VBC) payment models, whichalign rewards and penalties with cost, quality, and outcomes measures.

As such we continue to witness a step change in the operating and commercial abilities of traditional life science occupiers and the associated markets within which they operate. Sheer demographics are also resulting in health quality, product and service not keeping pace with longevity of communicable diseases in developing economies. Population access to treatments and facilities continue to be dictated by localised infrastructure and level of investment supporting its implementation. New markets in Africa and Asia are emerging and attracting new market entrants – where formerly only generics companies played – but market access will continue to dictate where these opportunities are actually being realised.

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GLOBAL MARKET MAKE UP – KEY TAKEAWAYS

c. $1.9 trillion Global Life Science market size andgrowing (Pharmaceuticals $1.23 trillion, Biotech $289 billion, Med tech $364 billion)

Collectively, Canada, France, Germany, Japan, the UK and the US still generate more than half of global life sciences total revenues.

According to FDI Markets 42% of all global life science capital investment during 2015 was into the US market (an uplift on the 27% average over the past five years). Currently 28% of global life science investment is sourced from the US (38% over the past five years) / 23% of US funded investment stays within the US with Ireland / China / Singapore also hotspots for investment by US corporates.

Growth in global healthcare expenditure as a proportion of GDP will be approximately 4% on average per annum during 2016 to 2019 according to the EIU. In developing economies growth rates, can be much higher. Projections of nearer to 10% per annum are anticipated in some instances.

During 2015 the number of pharmaceutical jobs created was 18% below the 10 year average - indicative of the volume of M&A activity taking place and increase reliance on technology / automated processing. Despite this 33% of all FDI projects cite access of skilled labour as the primary motive behind investment, while 37% of all companies believe this to be crucial to their business decisions. Other key motives include domestic market growth potential and access to the key customer base.

89% of corporates indicate human talent to be the highest cost to their business while 67% of occupiers highlighted the workplace as being crucial to talent retention. Meanwhile almost 25% of companies indicate innovation as a key strategic challenge to their operations, according to a survey carried out by Cushman & Wakefield.

2,000

0

4,000

6,000

8,000

10,000

12,000

14,000

200

3

200

4

200

5

200

6

200

7

200

8

200

9

2010

2011

2012

2013

2014

2015

Mill

ion

US

D p

a

Capex - Life Sciences

5,000

0

10,000

15,000

20,000

25,000

30,000

35,000

200

3

200

4

200

5

200

6

200

7

200

8

200

9

2010

2011

2012

2013

2014

2015

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

Investment DestinationUni

ted S

tate

s

China

Irelan

d

Singap

oreIn

dia

Germ

any

Franc

e

Canad

a

Puerto

Rico

Spain

US

D (

mill

ion

s)

Source: FDI Markets / Cushman & Wakefield

CAPEX LIFE SCIENCES

PAST 5 YEARS INVESTMENT INTO REGION PAST 5 YEARS INVESTMENT FROM REGION

NO. JOBS CREATED ANNUALLY

Investment Source

US

D (

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Unite

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Switz

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d UK

Germ

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Franc

e

Japan

Denm

ark

India

Israe

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Canad

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5,000

10,000

15,000

20,000

25,000

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GLOBAL SPEND ON HEALTHCARE CONTINUES TO VARY BUT WHERE WILL FUTURE DEMAND COME FROM

Demographics continue to shape the life sciences world with today’s consumers more informed, involved in, and financially responsible for their healthcare decisions. As a result there are higher consumer expectations for services and products with new markets continuing to emerge and those markets that have already - in some instances now starting to mature.

While the US, Canada and Australia remain the largest spenders on healthcare per capita looking ahead the Middle East and Africa and markets in Asia are anticipates to witness the most significant growth in healthcare spend as a percentage of overall GDP. On average seeing 9.3% and 6.6% growth per annum respectively between now and 2019.

In Western Europe pressure to reduce debt and fiscal deficits have meant tightening budgets in countries impacted most by the Eurozone crisis such as Greece and Italy.

Stronger markets such as the UK, Germany and Sweden continue to be hit by reforms restricting growth potential and increasing competition among providers.

In the US and Canada growth rates are anticipated to be more restricted. The US remains driven by the expansion of insurance coverage. Here healthcare spending is to reach c. 18% of total GDP by 2019.

In Canada a slightly slower growth rate of nearer to 4.5% per annum is anticipated with healthcare spending expected to reach 18% of GDP by 2019.

NORTH AMERICA

4.8%

3.1%

1.4%

6.6%

4.3%

9.3%

WESTERN EUROPE

ASIA

MIDDLE EAST & AFRICALATIN

AMERICA

GLOBAL

Source: EIU

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TALENT ATTRACTION AND RETENTION REMAINS KEY

While M&A continues to reshape business strategies and occupier locations, with consolidation clearly visible in recent new job creation numbers, the life sciences sector is demanding higher skilled labour as this sector remains focussed on innovation, which means finding and retaining the best in class talent for R&D is critical to the corporate agenda.

Life science companies are faced with a decrease in technical and professional skills with companies needing to compete for talent at a global level. From fostering collaboration, to simply increasing the amount of natural light, choosing the right spaces in the right places can be a powerful tool in talent recruitment and retention, greater innovation and productivity.

Through a recent survey carried out, targeting life science operators, it is clear that the talent agenda remains central to corporate strategies. Nearly three-quarters of all Pharma CEOs are now casting their nets further and searching for talent in different areas. Nearly two-thirds also have a strategy for promoting talent diversity.

LOOKING TO THE NEXT GENERATION

The increase in the Biopharma sub-sector requires highly educated employees and, therefore, real estate near elite educational institutions has become increasing popular. In order to retain top talent, companies are investing in new spaces that enables productivity and innovation, offering new special infrastructure and lab equipment.

Most life science corporates are now looking to partner with academia, suppliers, customers or governments, largely to secure access to new technologies and customer pools to develop an ecosystem suited at driving innovation. Therefore the new production of space is focused on collaboration. As a result, new cluster-labs are placed in more mixed use/urban and vibrant locations.

c.75%

c.66%

LIFE SCIENCE CORPORATES LOOKING FURTHER AFIELD TO SECURE SUITABLE TALENT

PROMOTING TALENT DIVERSITY

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WHAT DOES THE FUTURE HOLD? Inevitably, as the sector continues its transition at pace, rising competition from generics and from emerging markets will force branded pharma to invest in talent, technology and facilities that enable innovation. M&A activity and industry consolidation have already provided opportunities for new entrants to leverage some of the resulting higher quality infrastructure and specialised facility vacancies including lab, pilot plant and manufacturing space. We anticipate there to be a further round of M&A transactions, with many properties – unfit for purpose - now selectively redeveloped or repurposed for alternative uses.

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5 LIFE SCIENCE PREDITIONS FOR 2016 AND BEYOND

1. Demand for complex asset disposal and partnerships withreal estate service providers to ensure optimal outcomes willincrease among the key life sciences company’s in maturemarkets. Rising rents will continue to add to bottom line costsfor pharmaceutical firms. An increase in demand for rentalproperties is also fuelled by rising construction costs, whichare only anticipated to rise further across Europe.

2. Workforce optimisation and optimising relocation expensescontinues to remain the most significant challenge for the lifesciences organisations. Detailed analysis and understandingof government policies, grants and incentives will remain keyfactors for relocation and development.

3. M&A consolidation will create some opportunity for smalland mid-size firms to relocate from incubators in secondarymarkets and secure space in tightening primary life sciencesclusters.

4. Big pharma will continue to acquire new small firms, and thiswill require them to renovate older facilities to meet the needsof millennial employees or seek out new space that does. Stillother firms are remaining in their existing lab space, despiteacquisitions, as they use existing infrastructure for highlyspecific research. As such vacancy rates in key markets arelikely to remain low.

5. Developers are to open up new submarkets to lab spacedue to high occupancy rates and a lack of suitable products.Larger firms may start to consider lower cost secondarymarkets to develop build-to suit- lab space. But over the shortterm, the traditional clusters will be more active from a leasingperspective. There will also be a need for more specialisedlab and co-working incubator space as firms focus on live-cultured biopharma research. The higher costs to develop incore markets may inspire firms to rent instead of own in thefuture carrying the potential to add to market competitionlevels in hub locations and push demand out to secondarymarkets, including lower cost suburban areas.

CONTACT DETAILS

Craige CorenGlobal Occupier Services +44 (0)20 3296 3343 craige.coren@cushwake.com

Neil Gorman, MRICS Global Occupier Services +44 (0) 20 3296 3194 neil.gorman@cushwake.com

Andrew HeardResearch+44 (0) 203 296 3034andrew.heard@cushwake.com

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