By the Numbers: What it Costs to Operate a Biopharmaceutical Facility

BioPharm International, BioPharm International-10-01-2005, Volume 18, Issue 10

Operating costs are the white-hot issue in the boardrooms of our life sciences clients and they tend to rule the site selection process. A soft economy, worldwide trade competition, drug cost containment pressures from the US government, and a lean and mean message sent by the venture capital community mean that quantitative factors that focus on the cost of doing business are trumping qualitative lifestyle factors, especially when evaluating sites for a new biopharmaceutical facility.

Operating costs are the white-hot issue in the boardrooms of our life sciences clients and they tend to rule the site selection process. A soft economy, worldwide trade competition, drug cost containment pressures from the US government, and a lean and mean message sent by the venture capital community mean that quantitative factors that focus on the cost of doing business are trumping qualitative lifestyle factors, especially when evaluating sites for a new biopharmaceutical facility.

Many of our site-seeking clients tell us that the only way they can improve the bottom line is by reducing costs because it is extremely hard to improve the revenue side of the ledger. High-profile corporate accounting cases like Bristol-Myers Squibb and product liability cases like Merck's Vioxx withdrawal have caused corporate boardrooms to focus heavily on balance sheet issues and the true cost of conducting business. For example, Pfizer is implementing a $4 billion cost-containment program that will re-shape its network of operations in California, Michigan, Connecticut, Massachusetts, England, and Japan.

MAKING A LIST

Our company conducted a corporate location study comparing the cost of doing business for the biopharma industry in 50 cities in the US, Canada, and Europe. The study analyzed all the major cost drivers of the corporate site selection process. These included salaries for employees with advanced degrees in the life sciences, wages for workers in other laboratory and administrative support positions, fringe benefits, utilities, lease rates, and other geographically variable operating costs. All costs were expressed in US dollars and are scaled to a representative 100-worker biopharma facility occupying 75,000 ft2 of office and laboratory space.

Locations featured in the study include long-standing centers of the biopharma industry such as San Francisco, Boston, Central New Jersey, North Carolina Research Triangle, and San Diego. We evaluated emerging new hubs of the industry such as Des Moines, IA, Norman, OK and Sioux Falls, SD. European biotech centers studied include London, Brussels, Düsseldorf, Amsterdam, and Madrid. The Canadian centers are Vancouver, Montreal, and Toronto.

John H. Boyd

The costs included in our biopharma reports are termed geographically variable, that is to say, those operating costs vary significantly by geography. Labor cost differentials were shaped by Boyd field interviews with major employers in candidate locations and were scaled to a representative 100-worker biopharma research and support staff. Fringe benefit costs, including all statutory benefits, pay for time not worked, and company-sponsored benefits were estimated by Boyd and reflect prevailing averages in all US, Canadian, and European locations in the analysis. Utility costs reflect local rate schedules for monthly electric requirements of 150,000 kWh. Boyd professionals honed in on real estate costs through field investigation and contact with local real estate professionals. Costs were scaled to a model 75,000-ft2 biopharma facility.

Equipment costs were based upon Boyd case study estimates and reflect a seven-year amortization rate with payment factor of 5.0 percent. Heating and cooling costs were a function of power cost differentials and comparative heating and cooling degree-days data (30-year National Oceanic & Atmospheric Admin-istration [NOAA] averages). Boyd travel cost figures (reflecting cooperate lodging, three meals, rental car and local transit, and other incidental costs) were obtained from Boyd's client BTN (New York) and investigative field research. Annual travel costs were based upon 22 billable corporate travel days per week (for multiple traveling employees) at each of the surveyed biopharma locations.

Operating cost differentials between a high-cost city and a more cost-efficient biopharma site can be substantial, running into millions of dollars per year. Annual operating costs in the US range from a high of $11.2 million in San Jose, CA to a low of $8.4 million in Sioux Falls, SD. In Canada, annual operating costs ranged from $9.2 million in Vancouver to $8.5 million in Montreal. Among the European cities, annual operating costs ranged from $13.0 million in Düsseldorf to $10.1 million in Madrid.

Table 1. Total Annual Operating Costs (in Millions)

Table 1, which ranks the total annual operating cost for each city, is a distillation of our eight-factor analysis. In Table 2 we present a spreadsheet depicting the extreme differences in operating costs. Aside from a constant amortization charge, notice the wide variation in local charges. Space does not permit publishing data for all 50 cities, so they will be available on BioPharm International's website with this issue (www.biopharminternational.com).

Table 2. What It Costs to Operate a Biotech Facility: The Highs and Lows*

RELOCATION IS REALITY

In Europe, we see increasing corporate mobility as a result of historic business climate reforms and price transparencies brought about by the common (euro) currency. Now, operating cost penalties and conversely, cost savings, associated with the various European Union nations can be clearly perceived and easily quantified without the exchange rate and currency conversion vagaries of the past. Many of the tax initiatives, business attraction incentives, deregulation programs, and free market reforms that were fashioned in North America during the past 25 years are now being rolled out in Europe. Biopharma-related projects in Germany, France, and the UK are one of the fastest growing corporate relocation segments in Europe.

In the US, there is a growing shift of biopharma investment from many of the larger and expensive centers of life sciences industry concentration in New England and California to smaller, more manageable, and less costly metropolitan areas in other regions. A good example of this trend is HemaTech, a pioneer in the development of polyclonal antibodies. Originally operating in Connecticut and Massachusetts, HemaTech has relocated research and headquarters operations to Sioux Falls, SD, (pop. 200,000). Sioux Falls, home of the University of South Dakota Life Science Center, is the lowest cost biopharma site cited in the Boyd study. Other examples include Yamanouchi Pharma's move from San Francisco to Norman, OK; Dupont's relocation of its nutrition division from Wilmington, DE to Des Moines, IA; and San Diego-based Scripp's selection of Palm Beach County, FL, for its newest biomedical research lab.

Photo of Sioux Falls, SD, the lowest cost US city in the Boyd study and new home to Connecticut-based biotech transplant Hematech, Inc.

Canada continues to offer a low cost environment for the biopharma industry, even though the Canadian dollar rose substantially versus the US greenback during the past year. Biopharma companies can save additional labor costs in the area of fringe benefits due to Canada's nationalized healthcare system. Our biopharmaceutical clients in the US typically pay about 35 to 40 percent of their payroll for benefits (mostly healthcare-related). The same figure in Canada is 15 to 20 percent.

WHY GO TO SMALL CITIES?

A lower cost of living, especially the ability to buy more house for the money, is an additional advantage of the smaller cities. This is particularly the case when compared to the extremely high housing costs associated with tradi-tional biopharma industry hubs like Boston, San Francisco, New Jersey, and the Washington DC suburbs (Fairfax County, VA and Montgomery County, MD.) It is increasingly difficult for our clients to attract young, entry-level talent to these traditional locations, principally due to the prohibitively expensive housing markets there. States like South Dakota and Florida, which have no state personal income tax, provide additional relocation benefits to biotech transferees by enabling them to keep more of what they earn.

Increasingly, quantitative cost factors will trump other more quali-tative and subjective site selection variables within the boardrooms of major biopharma companies. Venture capital lenders, many burned by the dot-com crash, are asking small biopharmas and start-ups, "Do you really need to pay high rents or exorbitant relocation bonuses in costly markets like California's Bay Area, Boston's Route 128, or Washington, D.C.'s suburbs?

John H.Boyd is founder and president of The Boyd Company, Inc., 301 N.Harrison St. Suite 415, Princeton, NJ 08540, 609.890.0726, fax:609.588.0518, jhb@theboydcompany.comwww.theboydcompany.com.