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Finding space for biotech graduates: How some incubator managers are helping these special-needs clients land on their feet

by Corinne Colbert

June 2005

Of 13 graduates of the Quebec Biotechnology Innovation Centre in Laval, Quebec, Canada, only one has failed. Normand de Montigny, QBIC’s executive director, blames it on a building – specifically, the fact that the company built its own facility after it left the incubator.

“The cost was too heavy and they had to cease operations,” he says.

That’s a worst-case scenario, of course, but many biotechnology companies face the problem of finding suitable space when they leave an incubator.

A company could build its own facility, but as de Montigny’s former client discovered, such a move can prove fatal. Construction of lab space starts at $250 per square foot, says Bill Simon, vice president and chief operating officer of the Center for Emerging Technologies in St. Louis. Specialized labs can cost as much as $500 per square foot. Even if the new company has that kind of capital, the money could be put to better use.

“You want them to rent so money is focused on the business,” Simon says.

Not that renting is necessarily a solution, either. Part of the problem is size. “Most companies need only 10,000 square feet, which is the minimum a developer will look at” for new construction, Simon says. And even if the company can find such a small space in existing buildings, chances are it doesn’t feature the chemical hoods and sinks a biotechnology company needs.

Incubator managers can help their clients overcome these problems, though. One option is to cultivate relationships with local developers to educate them about the need for wet lab space and its viability, says David Lohr, executive director of the Virginia Biosciences Development Center in Richmond, Va., and an NBIA board member.

“You have to look at the local developers, the local community, to build that space,” he says. “You really need to have relationships with firms in your community who are qualified to engineer, design and build the space.”

Adds de Montigny, “There’s some education with real-estate operators unless they speculate in biotechnology. If they invest only in space for traditional office or technology companies, they have some adaptations to make.”

But speculation in laboratory space can be a risky proposition for developers, says Ann Lansinger, executive director at the Emerging Technology Centers in Baltimore.

“Most developers are afraid the company will go under, especially companies that haven’t gone through FDA trials,” she says. “If the developer is betting all they have on [FDA approval], they’re likely to lose their investment.”

Another option is to keep an eye on spaces already available. Simon recommends looking to former chemical or medical industry buildings; Lohr expands that list to include space being vacated by a more established company that is expanding. Still, he cautions, “The challenge is that it’s likely to be 25,000 square feet, and your client [may need] only 3,000 square feet. And the space is older and needs to be reconfigured.”

De Montigny has even seen graduates move into old university chemistry labs, “old buildings that didn’t always meet standards,” he says.

Such spaces can be refurbished fairly cheaply with secondhand furniture and equipment, says Lansinger. “But you have to be in a position to buy used cabinets, lab tops, furniture and equipment,” she says. Still, that can be done only if the chemicals the company uses aren’t caustic or otherwise dangerous, she notes; if that’s the case, the company will have to buy specialized equipment to safely handle those substances.

Yet another option is to share space. Lansinger says some of her clients have rented space from larger companies that have excess lab space. “Some of our graduates will call from time to time to say they have space,” she says. More often, though, she’ll match a client nearing graduation with local real-estate brokers to talk about their available options.

If companies can’t find the space they need, they’ll go looking for it – and that may take them out of the city or state where the incubator is located.

“We realize those companies would die if they didn’t move,” Simon says, but “it’s not a good outcome for us if they move to New Jersey.”

Here’s what some incubator managers are doing to help their biotech graduates find appropriate nests.

Quebec, Canada: Create a revenue stream

For the first seven years of its existence, QBIC occupied a 28,000-square-foot facility in the Laval Science and High Technology Park. By 2000, the incubator was operating at 100 percent capacity and needed room not only for new clients, but also for its growing list of graduates.

Finding a developer to build a new incubator facility for technology and biotechnology companies wasn’t easy. After a four-year search, QBIC found a developer willing to take on the project, with government guarantees that the C$24 million investment would be worthwhile.

And so it was that in mid-2003, QBIC moved into a 128,000-square-foot multitenant facility with space for the incubator and its graduates, located on land donated by Montreal’s McGill University in its research park.

The new facility gives the incubator and its graduates room to grow and provides QBIC a revenue stream: QBIC rents 25 percent of the space and manages the rest through a contract with the developer, providing revenue that supports the incubator’s operations. (The terms of the contract are confidential.)

QBIC has replicated this model as an additional revenue stream: The same developer who built QBIC’s Montreal facility finished a 90,000-square-foot multiuse building last year at Sherbrooke University in Quebec. QBIC manages that facility for the developer, creating additional revenue; it also provides technical services to an incubator in the Sherbrooke facility.

“It’s a way to commercialize our expertise,” de Montigny says.

QBIC’s graduating companies can move into space in the same building and expand as needed, while still benefiting from some shared facilities and equipment. “They graduate with steps,” de Montigny explains. This year, two QBIC graduates will move into post-incubation space. QBIC also offers its clients a “plus-incubation” option, in which QBIC works with an architect, lab suppliers and contractors to create a turnkey lab operation in the facility for the company when it graduates.

“We have realized that even if a company has 20 to 25 employees, usually they don’t have the expertise or time to manage such a big move because at the same time, they are involved in a new round of financing or hiring,” he says.

Richmond, Virginia: Plan for growth

VBDC is housed in the 34-acre Virginia Biotechnology Research Park, a partnership of the commonwealth of Virginia, the city of Richmond and Virginia Commonwealth University. A steady stream of clients comes from VCU and the Medical College of Virginia, whose campus is adjacent to the park.

From the beginning, the plan was to offer VBDC graduates plenty of room in the park, which after eight years has eight buildings and is still only one-third developed.

“Part of our overall strategy to attract companies was to provide step-up space for them to grow into,” Lohr says. Currently, four VBDC graduates are located in the park; others have already moved on. “Some of our early successes have left the park entirely for larger facilities in the surrounding suburbs,” Lohr says.

The park is overseen by the Virginia Biotechnology Authority, a state agency created to advance the life sciences in Virginia. Among its powers is the ability to issue tax-free municipal bonds, which are used to fund the construction of new buildings as needed. To speed up construction time, VBA commissioned an architect to create a prototype 25,000-square-foot structure with eight labs. The builder bases each new structure on the prototype, configuring it to the waiting occupants’ particular needs.

Construction still takes 12 to 15 months, Lohr says, so he’s always working at least that far ahead with his clients to ensure a smooth transition out of the incubator – and a steady flow of new clients to take graduates’ space.

“If Company A has three labs and is moving, you have to be thinking about who’s going to move into those labs,” Lohr says.

St. Louis, Missouri: Guarantee the rent

Simon is a big believer in capitalism. As he sees it, the solution to the problem of space for biotech graduates lies in local developers. “A developer buys a space, renovates it, rents it and makes a profit,” he says.

While that model works fairly well for standard office buildings, it’s harder to get developers to speculate on wet lab space. Most companies are ready to leave the incubator when they receive U.S. Food and Drug Administration approval of their products. Even with FDA approval, though, the company isn’t a cinch for success and almost certainly isn’t making money yet. Those doubts scare off developers, who want to be sure they will have tenants for their buildings.

What they want is a guarantee, and Simon is working to provide it. He is trying to raise $1 million from foundations and private donors to seed a $12 million rent-insurance pool. Four banks already have agreed to participate; Simon says he needs seven more to make the venture viable and expects to have them on board by this fall.

“Once we got the first couple of banks to do it, there’s no trouble with the rest,” he says.

Under Simon’s plan, the developer’s insurance premium would be built into the rents. If a tenant defaults on a lease, the developer can collect the insurance. “It gives the developer a little peace of mind,” Simon says.

He estimates that a $12 million pool will cover 250,000 square feet of rental lab space. Once that much space is rented successfully, he predicts, developers will overcome their fear of constructing lab space because there will be a proven example that it’s a safe investment.

The participation of the banks is crucial not only for their money, but also for their profile in the community. If a community backs an incubator, Simon says, it ought to work just as hard to offer space for the incubator’s graduates.

“If you want an incubator that grows companies, you have to do something with those baby companies when they pop out,” he says.

Baltimore, Maryland: Work the local market

The bursting of the technology bubble a few years ago is turning out to be a boon for biotech companies in Maryland. Just four years ago, when the Maryland Technology Development Corp. convened focus groups on the main concerns facing the state’s incubators, the lack of suitable space for biotech graduates was a top worry. Now, “companies are downsizing, so they have space they’re willing to sublet at inexpensive rents,” says Phil Singerman, executive director of Maryland TEDCO. “It’s more of a buyer’s market.”

And because of the changes in market conditions and the maturation of the biotech economy, Singerman says, developers in Maryland are more willing to take chances on biotech start-ups.

When they do, they turn to consultants like Patricia Larrabee, president of Facility Logix. Larrabee spent more than 25 years as a biotech researcher herself before making a career switch into lab-design consulting. Her company, headquartered in Burtonsville, Md., helps commercial real estate firms plan, develop and manage lab spaces for biotech and technology companies.

Larrabee already has helped one Baltimore landlord develop commercial lab space designed for small biotech companies. The facility is built around predesigned blocks of space ranging from 5,000 square feet to 12,500 square feet. Tenants share expensive equipment – including an autoclave, glasswash and emergency generator – that otherwise would require a significant cash outlay.

Larrabee says three other buildings in Baltimore are being developed in a similar model, in which the landlord pays for the renovation of the facility and the tenants split the cost of the shared equipment. That setup, Larrabee says, is being replicated in San Francisco and Seattle as well – areas that, like Maryland, have established biotech incubators and active university or institutional research labs. Their presence reduces the risk for developers, who want to be sure their investments in construction or renovation will be rewarded with a steady stream of tenants.

“If the design, construction and installed features are well thought out and the facility itself is in an active biotech cluster,” she says, “the space will not go unused for long.”

Getting to Graduation

Every fledgling eventually must leave its nest. But if the fledgling has nowhere to go, the question becomes: How hard should the parents push to get the fledgling out?

That’s the challenge for managers of incubators with biotechnology companies.

Some incubators let clients stay in the incubator past the time they should graduate. “I take the position that once I’ve brought you in, you’re part of the family, and we’re going to take care of our family before we add to it,” says David Lohr, executive director of the Virginia Biosciences Development Center in Richmond, Va.

Others take a tough-love approach. At the Center for Emerging Technologies in St. Louis, clients are on one-year leases. Although most clients stay in the incubator for four to five years, the one-year lease makes it easier to move out companies that have outgrown the space, says Bill Simon, CET’s vice president and chief operating officer.

“If the company wants to move its offices first and keep their labs here for a couple of months, that’s fine,” Simon says. “If they want to stay three more years, then we need to have a hard discussion.”

Keeping clients in the incubator longer isn’t a question of bolstering the companies’ financial health; as Lohr notes, incubator rents often are comparable to market rates, so clients aren’t getting a big break in that way. What they are getting, says Simon, is flexibility. If a client starts at 1,000 square feet and suddenly needs 3,000 square feet, the incubator generally can provide that. On the open market, they’d be stuck until their lease was up.

That flexibility can be a liability, though, if the incubator is full and there are new start-ups knocking at the door. The approval process for a new medical device – from official trial through application to final Food and Drug Administration acceptance – usually takes one or two years, Simon says. For drugs, the process can run four to 10 years.

No matter how long clients are sticking around, these managers say that communication is the key to maintaining a flow of clients out of and into the incubator: Regular meetings with clients to see where they are in the development of their product or service lets the incubator manager help them prepare to leave.

“ When they get the proper (government) clearances so they can sell, that’s when they need to be moving out,” Simon says.—CC

Keywords: facility renovation/expansion, facility selection/construction/renovation, graduation policy, regional capacity, relocation assistance, specialized equipment/facilities, technology incubator

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