Biotech start-up? Don't design for the long-term

01/01/2004

By Michael Kopp

Start-up companies and researchers in fast-growing biotech areas like metro Washington D.C., San Francisco, Raleigh-Durham and Boston are turning to labs that are the research equivalent of a brown-bag lunch—utilitarian, but basic. A growing niche of researchers and start-up companies with negative cash flow are looking for lab space to develop products from funding put up by venture capitalists.

A traditional place to secure lab space is by renting in the private sector market. But a shortage of lab space and its prohibitive cost for start-ups make this problematic. One response to real estate market conditions in recent years has been the creation of "incubators" by local governments and economic development authorities. Incubators offer small amounts of basic laboratory space, shared equipment space and other support facilities at reduced rental rates for a limited amount of time.

Universities are another sponsor of incubators. The role of universities in supporting biotech start-up companies is a natural extension of the fact that universities often own the patents, and researchers share in the profits. Other research entities in the Maryland/Virginia area, such as the National Institutes of Health (NIH), National Institute of Standards and Technology (NIST), the National Cancer Institute (NCI) and The Institute for Genomic Research (TIGR), also encourage such arrangements.

Due to the burst of the high-tech bubble, however, investors are cautious, and tend to specify that funds be directed to the research rather than to a facility. Across the board, the common denominator for start-ups and researchers is the acquisition of a relatively inexpensive lease. During this time of budget cutbacks in many areas, finding low-rent space can be a daunting proposition. In these biotech hotbeds, demand surpasses supply, and the search is competitive.

Yet, the choice of a facility remains critical to the quality of research; the integrity of a facility must not compromise research. When cost constraints seem stifling, researchers and start-ups often turn to real-estate brokers and bankers who have the expertise to provide a continuum of options, often on the lower end of the leasing scale. These specialists know how to find lab space that incorporates critical design elements but is generic enough to remain cost-effective.

According to Ken Smondrowski, a commercial real-estate broker specializing in biotech leasing at Southport Properties LLC in Bethesda, Md., a great divide exists in lease prices for labs in one such concentration of biotechnology start-ups—Montgomery County, Maryland.

Space can vary from $50/square foot to as much as $185/square foot. A company needs to search carefully to find space appropriate to its revenue stream, and several techniques can help determine the space that is most economical.

Progression of a lab

A company at the very beginning, or incubator stage, may still be small enough to use a small basic lab or sublease from a larger lab. As the firm becomes more successful, it may receive an initial infusion of cash and wish to move up to its own leased space, considered a first stage.

This space typically is more than 1,000 square feet but less than 5,000 square feet, and typically contains a mix of about 70 percent lab space and 25 to 30 percent walled office space.

When the company seeks to expand again, usually just two or three years later, it will probably lease one more time; second-stage leases are on average 5,000 to 15,000 square feet, according to some real-estate experts. It's important to note that the amount of space a company rents and equips should closely match the amount of space that's actually required.

If a company's growth supports an even greater space increase, it most likely will become sufficiently mature to build out its own space—completely designed to meet its own needs. As noted, companies typically stay in incubators only two to three years, after which time they go out of business, downscale, or build up.

So, what do researchers and incubators look for at the outset?

Because time usually is short, probably the most common solution is to lease plain lab space—the more generic, the better. This sort of company needs to get going quickly, and with the least up-front expenses. Since funding is limited, and the risks are usually high, why spend dollars on the best of labs when there's a chance of either going belly up or moving up in the near future?

Economical start-up solutions

First, companies on a tight budget can rent a lab where little space is exclusive to them, and the majority is shared equipment space with other researchers. For instance, they can share use of refrigerators/freezers, centrifuges, autoclaves—even conference rooms and other office space.

An economical lab will be designed with basic fit-outs (such as floor tile vs. epoxy or sheet vinyl), some casework, a sink and standard electrical outlets. The HVAC system may operate with air that is not recirculated. Gases will most likely come in portable cylinders, rather than be distributed through a central building-wide system. While larger laboratories have a significant amount of their electrical capacity on emergency power, a small start-up will have none or very minimal emergency power available—usually for a fume hood exhaust fan (a building code requirement), or refrigerator or freezer where product is stored.

Any need for purified water is most likely RO/DI (reverse osmosis/deionized) water. Rather than have a central building system, a small wall-mounted or under-the-counter system diverts water already being piped to a local sink.

Only experimental "bench-top" labs are possible on a minimal budget. Any clean steam systems, water for injection (WFI), or any other systems required for validated current good manufacturing practices (cGMPs) are virtually impossible to obtain on a minimal budget. Save money by purchasing refurbished, second-hand chemical fume hoods, bench tops, sinks and other laboratory equipment.

Start-up companies cannot design for the long-term. To cut costs, labs need to be designed with simple casework. Because start-ups are high-risk, everything must be simple and choices narrowed. Designing flexibility, durability or elegance for the long-term when the firm may only remain there an average life span of three to five years is simply frivolous.

Stringent requirements remain to demonstrate a principle on a benchtop. But although research remains critical, physical conditions are not. Temperature variations can broaden, and since no product is manufactured, there is not as much concern with uninterruptible power supplies.

As a rule of thumb, in a refurbished space, the first lab tenant must pay more in rent to cover the landlords' expenses in converting the building, especially if it was office space. The cost is amortized over time, so usually the second tenant will pay less rent. The second client also will enjoy the benefits of the improvements that already are in place. Finding existing lab space and altering it slightly to meet individual needs obviously is more economical than customizing to your own specs.

One of the most overlooked yet critical parts of a design is to prepare a well-thought-out equipment layout as well as the plan for the actual facility relocation. This allows equipment and operations to be immediately ready to connect in the proper place.

If the layout precisely accounts for every piece of equipment in conjunction with mechanical and electrical supplies, a move can be completed quickly and smoothly over the course of a weekend, without disrupting experiments.

As noted earlier, timing is critical. Start-up companies must be pliable, and cannot afford to wait long for renovations. Extensive waits could cause them to run out of funds and put them out of business. If nothing else, these companies simply need to get up and running quickly.

Contract research organization

If timing is extremely critical, start-ups may even turn to contract manufacturing or contract research organizations to conduct their work. It's often a cheaper, faster alternative, letting the start-up defer the facility cost. Start-up costs are lower and can assist in rapidly beginning experimentation.

On the downside, however, the firm may experience a perception of loss of control in the research being conducted. Its research or production needs may also be subject to the schedule of others at a time when speed is especially critical, negating the very benefit they sought in the first place.

Wrap it up

Overall, to save start-up costs and minimize risk, biotech firms should seek to occupy generic lab space. In the end, sharing equipment, while keeping furniture, casework, and mechanical, electrical and air supply simple can lead to bigger and better projects that are more customized to their needs. Initially drawing the budget line can help a startup get on its feet.

Michael Kopp, AIA, can be reached at [email protected]. Ken Smondrowski, commercial real-estate broker at Southport Properties LLC in Bethesda, MD, also contributed to this article.