Could a much-anticipated cure for coronavirus—or any number of other rare or difficult-to-treat illnesses—emerge from a private equity-funded flex lab? The rapt global response to the fast spread of Covid-19 points to rising demand for a faster-moving global drug development pipeline. It’s a test of the mettle of scientific advancement, and the ways and means in which potentially life-saving medical treatments are brought to market more efficiently. This may be the moment that the CDMO laboratory model—and investment case—comes under the microscope.

In January, Deerfield, a health care-focused investment fund with nearly $10 billion in assets under management across a portfolio of more than 200 private and public companies, announced an agreement with Discovery Labs to form the Center for Breakthrough Medicines—an outsourced laboratory space known as a contract development and manufacturing organization (CDMO), based in King of Prussia, Pennsylvania.

Upon completion, the $1.1 billion facility will become the world’s largest known single source for accelerating cell and gene therapies, providing preclinical process development, plasmid DNA, viral vectors, cell banking, cell processing and support testing under one roof.

Deal velocity

In addition to its allure as a biotech incubator, the new campus is part of a high-momentum trend in private market real estate investing around CDMO labs. In 2019, middle-market private equity investor, Ampersand Capital Partners commanded $1.7 billion for viral vector producer Brammer Bio to Thermo Fisher Scientific. The firm went on to acquire, first, Germany’s Vibalogics GmbH, a small CDMO specialized in virus treatments, and then another U.S.-based CDMO, North Carolina-based TriPharm Services, a maker of sterile injectables. In late January, TriPharm was acquired once again, this time by another private-equity-backed CDMO, Alcami, which is majority-owned by Madison Dearborn Partners.

The global market value for CDMO properties is already immense. Data as of 2017 put the size of the contract drug manufacturing market alone in the range of $70-75 billion. And it’s ripe for dealmaking: global corporate healthcare advisory firm Results Healthcare has characterized the market as a highly fragmented one, with major market players holding just 2-4% of CDMO market share.

Deerfield’s Center for Breakthrough Medicines is on track to become the world’s largest such CDMO, occupying nearly half of Discovery Labs’ 1.6 million square-foot life sciences campus in the Philadelphia suburb.

Power hubs

The initiative marks the second real-estate-focused push in recent months for Deerfield. In September, the company announced plans to invest $635 million on the purchase and renovation of 345 Park Avenue South, a 300,000-square-foot office space just north of New York City’s Madison Square Park, to become a metropolitan life sciences hub for university researchers developing biotech-focused startups.

It also coincides with a broadening global footprint for Deerfield. Last fall, the firm announced its first non-U.S. joint venture, Orchard Innovations, in cooperation with Israel’s Yeda Research and Development, the commercial arm of the Weizmann Institute of Science, near Tel Aviv. Under the terms of the agreement, Deerfield will support Orchard Innovations with up to $130 million of initial funding over 10 years to advance research and accelerate projects to Investigational New Drug (IND) readiness status. In December, Deerfield formalized a similar university R&D collaboration, Four Points Innovation, with medical researchers at Duke University.

Against this market backdrop and the current conversation around increasingly borderless issues of global health, Deerfield Partner and Managing Director Alex Karnal offered Investable Universe his thoughts on how private investment capital can facilitate increasing market demand for flexible laboratories.

Investable Universe (IU): First, let’s talk about the CDMO model in biotech real estate, and why this laboratory and production model is being deployed at the Center for Breakthrough Medicines. Why is this model attractive to you as investors?

Alex Karnal (AK): We are at the early days of what could be a therapeutic revolution. We expect that our ability to harness genetic insights, combined with our deep understanding at the molecular level on how diseases develop and how we could intervene with life-changing medicines, greatly improves the probability of success. This endeavor should attract increasing amounts of capital as there remains an enormous need to support and strengthen the biomedical research infrastructure. We must invest in the critical work of our nation’s scientists, which includes the ability to leverage the most optimized tools and systems. This infrastructure is capital intensive, ranging in complexity from simple offices, to more complex wet labs, to the most sophisticated GMP-compliant commercial manufacturing facilities.

With Deerfield’s leadership in the life-science and healthcare investment space, we’re looking to play a key role in creating a home for companies and the science community. Whether that home is at our innovation campus at 345 Park Ave South in New York City or the Discovery Labs in Philadelphia, we want to lead the charge in enabling these scientists to advance their important work.

Our Center for Breakthrough Medicines aims to address an essential need and comes from our observation of critically important missed opportunities in the industry. Over the last few years, the promise of gene therapy to cure genetic diseases has in several instances become a reality. On one hand, this is so exciting when you think about how many people can be rescued from and possibly cured of devastating diseases that they were biologically predetermined to acquire. On the other hand, we have seen an exponential growth curve in the number of treatments being created versus a barely linear increase in the supply of commercial grade manufacturing space. The resulting byproduct of this is a protracted period of nearly 18 months that it typically takes to get a medicine manufactured. Compare this fact to the reality that many people suffering from genetic diseases may only have months to live.

We decided to stand up for patients and to do something about this, and so our Center for Breakthrough Medicines will be the largest offering in the market, with a goal of improving this imbalance. While the Center alone won’t solve the problem, it is expected to be a great start and we plan to bring many more sites behind it.

IU: How does the CDMO model—or biotech real estate generally—facilitate M&A in the sector? Does it bring treatments to market faster? Does owning the real estate that houses the research meaningfully mitigate risk for you, the investor? 

AK: Investing in advancing the discoveries of brilliant scientists from the bench to the people who need them is quite risky. As a result, we need to charge a cost that compensates for this risk so that we can continue to invest and inventors can continue to invent.

Investing in purpose-built healthcare real estate is a much more favorable way to invest at scale in a principally protected manner. Here, we can put large sums of capital to work to create a special home for amazing scientists. We are protected by the land and facility value while getting the optionality from a very favorable macro therapeutic growth environment. This is a unique opportunity that comes from harnessing complex expertise in healthcare and real estate to enable advancement in ways that independently wouldn’t be obvious or possible.

IU: To what extent do you see real estate holdings as a hedge on riskier early stage/startup funding for life science companies? Is it “better to be a landlord?”

AK: I think to be effective here you can’t look at yourself as a landlord. That is the tragic flaw that can result if you don’t see the world across the combined expertise set that is at the intersection of real estate and life science expertise. While anyone can put up space, we at Deerfield want to create a home for scientists and their companies. The only way to do that is to see yourself as their mission-driven partner and surround them with every advantage you can. We are uniquely positioned to do this at Deerfield as we have a talented team of nearly 150 people that span expertise from drug development to epidemiology. We offer access to all of our expertise, insight generation and, when appropriate, capital. In doing so, this transforms the equation for our partners while enabling us to realize our dream of playing a major role in advancing healthcare.

IU: What about the relative attractiveness of the Greater Philadelphia/King of Prussia biotech cluster, compared to bigger hubs in Boston, San Francisco/Bay Area, or NYC—particularly on the heels of Deerfield’s investment in the proposed New York City Life Sciences hub on Park Avenue South? Why is the Philly area in your sights, in particular? 

AK: There is incredible talent in all of these areas. Our observation is simple here. While there is great talent in NYC and Philadelphia, there also remains the greatest deficit in the provision of space and few homes for scientific advancement. We decided if we were going to make a big push to solve that problem we might as well start where the problem is the greatest.

IU: Further to Deerfield’s announcement in January of its first international venture with Yeda Research & Development in Israel, do you have any additional comment on the firm’s plans for continued expansion into overseas markets or other international joint ventures? 

AK: We are looking to partner with the most preeminent organizations that generally attract the world’s leading scientists. In doing so, we hope to create a network like none before it and to be an enabler of life-changing medicine and technology at tremendous scale. If we can do this, it will translate to a better quality of life and saved lives for many generations to come. Pursuit of this mission is what gets us out of bed every morning. Geography will not be a barrier.

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