Rewriting the code of Life Sciences CRE2014 Corporate Real Estate Trends for the Life Sciences Sector

2 2014 Corporate Real Estate Trends for the Life Sciences Sector

The life sciences industry has experienced major upheavals in recent years. The changing healthcare landscape, patent cliff, tighter regulations and pricing pressures have forced companies to reconsider their business models and revamp their organizational structures. Industry leaders are focusing on improving efficiency, driving down costs and building more productive R&D platforms. This often leads to significant layoffs, acquisitions, spin-offs and relocations to more promising markets.

These changes inevitably affect corporate real estate (CRE) operations, demanding innovative solutions that can support the overarching corporate strategy. After R&D, real estate costs are among the most significant expenses for life sciences companies. From sophisticated laboratories and compliant manufacturing facilities to modern offices with flexible workplaces—optimized and efficient real estate portfolios are required to uphold business goals while supporting the bottom line.

This report analyzes the responses of life sciences CRE executives to JLL’s 2013 Global Corporate Real Estate Survey. Their views point to some alignment challenges for the CRE function in the industry while emphasizing extremely high demands for optimizing portfolios that shift across geographies.

Please refer to JLL’s Global Corporate Real Estate Trends report for global CRE trends.

Three CRE trends for the life sciences sector:

1. CRE’s disconnect with business strategy creates

performance risks

2. Mounting senior leadership demands for portfolio

optimization put more pressure on CRE teams

3. Geographical shifts compel portfolio reshuffles

Introduction

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CRE success hampered by a disconnect with the C-suite

The CRE function is quite well established in the life sciences sector. Sixty-three percent of CRE employees and 48% of global heads of CRE in this industry are positioned within a dedicated CRE department (compared with 55% and 38%, respectively, in other industries). Yet respondents report a degree of disconnect between CRE departments and overall business strategy and operations, which potentially limits the contribution and visibility of the CRE function within an organization.

The biggest factor contributing to the disconnect between CRE departments and business strategy is a lack of communication with the C-suite. In fact, among all sectors, life sciences CRE is the least connected to the C-suite, with the majority of CRE executives reporting at the managerial level (Fig 1). This issue stems from the organizational structure life sciences firms tend to have: revenue-generating activities report directly to the C-suite, while support functions report to lower-level officers. Since the CRE function is not seen as a core element of the business, it is not top of mind for the C-suite when making important planning decisions. This prevents the CRE function from contributing to the leadership agenda and, consequently, reduces its impact on the overall corporate strategy.

Figure 1. Reporting lines for the global head of CRE

Question: To what level of the organization does the global head of CRE currently report to?

Note: C-suite refers to senior company executives such as the CEO, COO and CFO; managerial level includes presidents, vice presidents and managers; executive level includes officers and supervisory roles; and operational level includes administrators, personal assistants and clerks.

Life sciences Other industries

C-suite Managerial Executive Operational Other

38%

59%

46%

25%

13% 14%

1% 4% 1%

4 2014 Corporate Real Estate Trends for the Life Sciences Sector

Given the limited connection with the C-suite, it is not surprising that a lack of sustained C-suite commitment represents a major challenge for CRE teams. More than half of the life sciences respondents reported that it was the key constraint hindering CRE from enhancing itself as a strategic value add to their organization compared with less than a third in other sectors (Fig 2). The lack of C-suite commitment even outweighs financial constraints, which is cited as the most challenging hurdle for CRE across all organizations.

Figure 2. Major constraints hindering CRE from enhancing its strategic position

Question: In your opinion, what are the top two constraints that are hindering CRE from enhancing itself as a strategic value add to your organization?

Another important factor affecting CRE performance is team organization. A third of life sciences respondents pointed out that the fragmented and/or decentralized nature of their teams prevents them from adding strategic value to their organization. This, again, could be explained by the typical structure of life sciences firms which tend to be organized around products (by therapeutic area) or by business unit.

Life sciences Other industries

C-suitecommitment

Financialconstraints

Fragmentedteam

Data andanalytics

Skill sets/knowledge

31%37%

56%49%

33%26% 26%

35%

22%26%

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This fragmented structure, combined with the lack of rapport with the C-suite, appears to affect the CRE relationship with other corporate functions. CRE’s collaboration with the human resources (HR) department is currently the most limited of all industries—with just 19% of life sciences CRE respondents engaging in shared services integration with HR and 22% not having any interaction at all (Fig 3). While in other sectors, CRE functions are expected to have a significant increase in collaboration with HR in three years’ time, integration in life sciences will only see a slight upturn to 26%.

Figure 3. Level of integration with other corporate functions, today and three years from now

Question: How would you describe the collaboration of CRE with the following business functions today and in three years’ time?

Note: Percentages represent proportion of ‘shared service integration’ responses.

A decentralized CRE organization that is disconnected from other business functions and from the C-suite can create significant performance risks for CRE teams. With little linkage to business strategy, CRE departments may have to operate primarily on a tactical level where day-to-day business needs drive CRE activity. In addition, following rapid business transformations, CRE teams often have to respond to immediate requirements of reorganized or relocated business divisions which may also limit them to tactical solutions. The challenge for CRE teams in life sciences companies is to balance the need for responsiveness and optimal real estate solutions at a local level, while ensuring greater proactivity and alignment with overarching strategic objectives.

Life sciences All industries

HR now HR in3 years

IT now IT in 3years

Financenow

Financein 3 years

27%

45%

31%

46%51%

60%

6 2014 Corporate Real Estate Trends for the Life Sciences Sector

As life sciences companies continue to transform, senior leadership expectations for optimized portfolios are increasing exponentially. Demands related to portfolio efficiency, costs and flexibility are the most critical and are expressed to a higher degree than in most other sectors (Fig 4).

Figure 4. Increasing senior leadership demands on CRE

Question: How are the demands of senior leadership/C-suite on the CRE team changing in the following areas? (Those who responded that demands are increasing)

Demands for portfolio efficiency represent a major challenge for CRE teams. Life sciences companies traditionally own many of their core assets, including R&D labs and manufacturing facilities. However, as the industry evolves, companies are exploring new products, using new

Strong demands for portfolio optimization

Increasing the utilization of existing buildings in the portfolio

Transforming the quality of the portfolio/workplace

Enhancing productivity of the real estate portfolio

Reducing direct real estate costs

Reducing the run costs of the real estate portfolio

Challenging the business on its presumed space needs

Presenting scenarios and solutions to the business on demand, bringing innovation into the real estate function and portfolio

Life sciences Other sectors

93% 72% 81% 63% 74% 66%

85% 74% 81% 71%

74% 63%

67% 63%

Effic

ienc

yC

osts

Flex

ibili

ty

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Regional portfolio reshuffle

“Novartis is shifting its center of gravity toward these fast-growing

markets, particularly China, in order to drive growth, gain access

to broad distribution networks, tap into local market expertise and move a higher volume of medicines

to those in need.”

Joseph Jimenez Novartis CEO, in China Daily

1 For more details on property disposal solutions, please see the JLL report Releasing Value from Complex Assets.

The life sciences industry’s move to more profitable and faster growth models includes reorienting their geographical presence, focusing on opportunities in emerging markets. The changes in life sciences real estate portfolios that follow are some of the most drastic among all industries. (Map 1)

Our survey showed that over a third of life sciences companies anticipate reducing or consolidating their real estate portfolios in European markets, such as the Netherlands, Italy and Spain (with 0% planning to increase). On the other hand, 63% and 48% plan to increase their portfolios in China and Brazil, respectively (with 0% planning to decrease). Russia, the third most favored market, is expected to see 35% net portfolio growth.

Life sciences companies are not only moving their production facilities—whole business units and R&D centers are shifting to emerging markets as well. Countries such as China, Brazil and Russia are investing heavily in global drug development businesses. New life sciences clusters lure companies by offering access to universities, research institutes and open innovation platforms. Partnership schemes allow companies to tap into local talent pools and share facilities.

technologies and research methods, and employing different operational models. Hence, their historical facilities often become unsuitable and underutilized. In addition, many companies face the challenge of surplus facilities acquired through M&A activity, which makes their portfolios even more complex to manage.

As a result, life sciences companies are increasingly implementing strategies such as asset disposals, portfolio consolidations, and flexible workplace solutions.1 For example, GlaxoSmithKline has sold some of its buildings and consolidated its R&D portfolio in North Carolina, USA to reduce its Research Triangle Park space by almost 50%. Combined with its SMART Working program, this portfolio optimization project saves the company millions of dollars per year.

8 Global Corporate Real Estate Survey 2013

Multinational life sciences firms realize the importance of creating a presence in emerging markets beyond manufacturing and distribution. In 2012, AstraZeneca announced it would open its China Innovation Center in Pudong, Shanghai, a facility that would produce injectable and oral drugs for the domestic market. In 2011, Pfizer opted to relocate its antibacterial research unit from Groton, Connecticut (USA) to Shanghai, at its Pfizer China Research and Development Center. Following the strategic move from ‘made in China’ to ‘created and discovered in China’, Sanofi established its regional R&D center in Shanghai, while the purchase of Medley SA in 2009 gave Sanofi ownership of Brazil’s third largest pharmaceutical company and the country’s biggest maker of generic drugs.

Such geographical shifts will continue in the future, leading to more changes in real estate portfolios. This, in turn, could prompt life sciences companies to increasingly partner with service providers as a way of gaining flexibility and expertise in less familiar markets. Life sciences companies are already the most active sector in outsourcing their portfolio and facilities management (22% are fully outsourcing, compared to 13% in other industries), and this trend is expected to increase in the next three years—to a point where one-third of life sciences companies fully outsource these activities.

Map 1: Net portfolio growth anticipated over the next three years (life sciences companies)

Question: Over the next three years, how will your portfolio evolve in each of the following regions?

Note: Net portfolio growth percentages in this map are obtained by deducting responses anticipating portfolios to decrease from responses anticipating portfolios to increase.

Other possible responses (‘remain the same’, ‘do not know’ and ‘not applicable’) were left out.

CountryRest ofRegion

Negative Net Portfolio Growth (30+%)

Negative Net Portfolio Growth (11-29%)

Negative Net Portfolio Growth (1-10%)

Stability (~0%)

1-10% Net Portfolio Growth

11-29% Net Portfolio Growth

30% + Net Portfolio Growth

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CRE C-suiteCorporate function Core

business

Conclusion The unprecedented business transformation in life sciences is having a profound impact on real estate portfolios. Senior leadership is placing immense pressure on the CRE function to deliver optimized, effective and cost-efficient portfolios, as well as to support the drive into new and emerging markets. Yet it is clear that evolution is also required in CRE itself.

Best-in-class life sciences companies have recognized the shortfalls of a localized reactive model and are now investing significant effort in better alignment with the core business. This is evidenced through the reorganization of a number of CRE teams in leading life sciences companies, as well as changes to reporting structures. Better alignment with the broader business through the use of quality data and proactive portfolio management and strategy is also in focus.

To succeed in the dynamic life sciences business environment and capitalize on the expansion in emerging markets, CRE teams will need to reinforce their dialogue with the C-suite, establish and drive a closer collaboration with other corporate functions, and ensure effective communication and alignment between local, regional and global CRE departments. Only after proving its strategic role—boosted by senior leadership support—and working cohesively with the other functions will life sciences CRE be able to provide optimal solutions for the business on all levels (local to global) and in all geographies.

10 2014 Corporate Real Estate Trends for the Life Sciences Sector

Business Contacts

About JLL

Christian Beaudoin Director of Corporate Research Americas christian.beaudoin@am.jll.com

Susan Sutherland Director of Corporate Research Asia Pacific susan.sutherland@ap.jll.com

Kateryna Kyryllova Manager of Corporate Research Asia Pacific kateryna.kyryllova@ap.jll.com

Tom Carroll Director of Corporate Research Europe, Middle East, and Africa tom.carroll@eu.jll.com

Richard McBlaine Managing Director Corporate Solutions Americas +1 312 228 2793 richard.mcblaine@am.jll.com

Mike Walsh Managing Director Corporate Solutions Asia Pacific +65 6494 3891 mikeE.walsh@ap.jll.com

Charles Tillett Director Corporate Solutions Europe, Middle East and Africa +44 (0) 207 852 4643 charles.tillett@eu.jll.com

Contributing authors

JLL (NYSE:JLL) is a professional services and investment management firm offering specialized real estate services to clients seeking increased value by owning, occupying and investing in real estate. With annual revenue of $4 billion, JLL operates in 75 countries worldwide. On behalf of its clients, the firm provides management and real estate outsourcing services for a property portfolio of 3 billion square feet and completed $99 billion in sales, acquisitions and finance transactions in 2013. Its investment management business, LaSalle Investment Management, has $47.6 billion of real estate assets under management. For further information, visit www.jll.com.

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About JLL Corporate Solutions

A leader in the real estate outsourcing field, JLL’s Corporate Solutions business helps corporations improve productivity in the cost, efficiency and performance of their national, regional or global real estate portfolios by creating outsourcing partnerships to manage and execute a range of corporate real estate services. This service delivery capability helps corporations improve business performance, particularly as companies turn to the outsourcing of their real estate activity as a way to manage expenses and enhance profitability.

Acknowledgements

JLL gratefully acknowledges the assistance of those CRE professionals who participated in this survey, and Kadence International, our market research partner. We welcome any feedback on the published results to continue to improve future editions and make them as meaningful as possible for our readers. If you have any comments or would like to participate in future surveys, please email insightteam@jll.com.

Visit www.jll.com/globalCREtrends to explore the global trends in more detail. See how CRE executives based in your region responded and compare your answers with the global survey results.

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