Drugmakers look to property portfolios for cost-savings
pharmafile | December 1, 2009 | News story | Manufacturing and Production |Â Â CB Richard Ellis, propertyÂ
Increasing numbers of pharmaceutical companies are cutting costs by selling properties and leasing them back off the new owners, according to new survey from consulting firm CB Richard Ellis.
Much of this activity is being driven by the wave of consolidation that has hit the industry in the last few quarters, but it also reflects changing attitudes among the top pharmaceutical manufacturers to their real estate portfolios.
The pharmaceutical is unusual compared to other corporate sectors because it owns around 75% of its property directly, according to Nick Compton, who notes that the top 10 drugmakers occupy “at least” 430 million square feet of office, manufacturing and R&D space.
That level of ownership “reveals a huge amount of potential to cut costs through consolidation, space efficiency strategies, disposal and relocation”, says Compton.
With profitability in the industry on the slide, pharmaceutical companies are looking again at facility ownership and considering monetising these expensive assets via leaseback deals, according to CBRE’s report on the survey, entitled The Pharmaceutical Sector: Real Estate Implications of Industry-Wide Change.
The survey – conducted with executives from the top 10 pharmaceutical manufacturers – found that 80% of respondents were taking part in monetisation activities to help offset merger costs and pay down debt.
While most of this activity is focusing on generic assets such as offices and warehousing, 20% of respondents said they are also considering extending the approach to specialised assets like manufacturing plants and R&D laboratories.
Compton believes one reason for this relatively low rate is that the benefits of being an owner-occupier are high, while there is also a lack of demand for specialised assets from the mainstream property investment market.
There are signs that this is changing however, as the number of landlords that understand the dynamics of specialist assets increases.
“At the moment the phenomenon is more advanced with R&D than manufacturing facilities, but the investment market will become more expert at handling both these types of properties,” he told Pharmafocus.
In manufacturing specifically, there is a general overcapacity in mature economies which, coupled with fast growth in capacity among emerging economies, is promoting the outright divestment of facilities.
A favoured option – particularly for plants making end-of-lifecycle products – is selling the plant to a contract manufacturing organisation (CMO) which can continue to make product for the former owner. A good example of that is the sale of Pfizer’s manufacturing plant in Morpeth, UK, to India’s Nicholas Piramal in 2006.
Leaseback of a facility becomes more likely when the plant is located in a high-value property area that is ripe for redevelopment when the pharmaceutical company is no longer in occupancy, according to Compton.
Meanwhile, an increasing proportion of pharmaceutical products will be manufactured in lower cost economies, such as Eastern Europe, India and China, where demand for space will increase, according to the report.
Scale-up processes in pilot plants and smaller scale, highly complex manufacturing will however likely remain in mature economies, it says.
“It is clear that pharmaceutical companies are accelerating plans to rationalise their real estate portfolios,” said Compton.
“While this also occurred during the consolidation that occurred earlier in the decade, we anticipate this will take place much more quickly with the latest batch of mergers.”
