The cost of doing biotech business: Midwest cheaper than the coast, but not by much?

12 Sep The cost of doing biotech business: Midwest cheaper than the coast, but not by much?

In an article I wrote a few years back, I reviewed the cost for doing business for a biotech company in different regions of the U.S. The biotech monthly journal Genetic Engineering News has just brought out a new U.S. and Canadian update in its September edition on these costs, and contrasted them.
Before we look at this analysis, the first reaction one has is that both the East Coast and West Coast will be significantly higher than the Midwest due to the high cost of real estate (office, wet labs, and personal). The results of this latest study suggest that, yes, the costs are higher but not by as much as we think.
According to GEN’s latest survey, they reviewed 34 major and emerging hubs, including five in Canada. The study was actually done by the Boyd Co. and includes the following measurement parameters:
• Labor (based on a weighted average annual earnings of a typical employee, and the additional impact of fringe benefits) – This aggregates into a typical company’s total annual labor cost, it is the single largest cost, and it represents 75 to 80 percent of total cost.
• Electric power and natural gas costs.
• Amortization costs.
• Property and sales tax costs.
• Lease costs.
• Heating and air conditioning costs.
• Corporate travel costs.
The total of the above, then, is summarized into what is called “Total Annual Geographical Variable Operating Costs,” which has two versions:
• One version is based on construction of a facility (amortizing these costs via a loan).
• The other version is based on leasing of a facility.
Note the key assumptions in the study related to the above:
1) Size of the biotech company: 110 workers.
2) Size of the biotech facility: 22,000 square feet.
This means that a typical facility would allot about 200 square feet per employee, which seems pretty small when you take into account common areas such as entrance lobby, bathrooms, conference rooms, cafeteria, hallways, and, of course, wet labs, the basic ingredient of a biotech company.
It is not clear in this study how many of the 110 employees are scientists and how many are business or administration-related; a typical biotech company would have about 65 percent of its space as labs in the earlier stage of the company’s development, with the rest being for office. Over time, as the company grows, this would shift, with an increase in office space. A typical lab scientist needs at least 500 square feet, while a typical office worker would have at least 100 square feet of office space. I think the space they are using is more likely for about 50 to 60 people, so I think the real estate cost component used in the study is low.
The study also points out some interesting observations that skew results:
• States such as Texas, Florida, and Nevada have no state personal income tax; this is important when you take into consideration relocation expenses, which are often paid by a company but taxed as personal income.
• Canadian companies have a lower cost for fringe benefits than the U.S. (15 to 20 percent of total paycheck versus 35 to 40 percent in the U.S.). Canada does have a higher personal tax rate, however.
• Another key issue regarding Canada is that it is historically cheap due to the Canadian dollar position against the U.S. dollar. Five years ago, the Canadian dollar was worth U.S. $0.65 and two years ago it was worth U.S. $0.85. Today, it is at U.S. $0.95, still cheaper than the dollar but rapidly appreciating against the dollar. It is not clear at what time point the Canadian data was used in this study.
• The average cost of employees also has a range going from about $80,000 per employee in New York, $78,200 in Boston, $76,600 in San Diego, $76,600 in Minneapolis, and $60,550 in Vancouver (alas, Chicago was not available!). I have some difficulties believing that there is only a 4 percent difference between Minneapolis and New York, as identified in this study.
So to try and get a handle on the cost increase or decrease versus the Midwest, I will use Chicago, probably the most expensive city in the Midwest, as our barometer and make it 100 in this index. Because of the two different real estate scenarios above (“build” or “rent”), I will show both results from the study. The analysis below is for a facility construction.
U.S./Canada Biotech Company Operating Costs By City – 2007

Source: Genetic Engineering News, Sept. 2007
A couple of observations are in order:
• Key biotech cities such as Seattle, Research Triangle, Denver, and Salt Lake City are not included in this analysis. The first three metro areas have at least 300 biotech companies each.
• The major impact on the above is salaries/compensation, which generally says that salaries are generally similar around the country, which I question.
• As there is not a breakdown of the real estate costs of construction/building, I have to believe there are much bigger cost differentials than reflected above. While typical biotech wet lab space can cost about $250 to $300 per square foot to build around the country, this doesn’t include the land cost, which can vary greatly. I find it hard to believe that the full operating costs of Chicago and San Diego are comparable, and that San Francisco and Boston are only marginally more expensive than Chicago.
• I have to believe that the full impact of the Canadian dollar revaluation is not in play in this analysis. I would have believed this analysis a few years ago, but the revaluation of the Canadian dollar has closed a huge cost gap.
Let’s take a look at the second comparison, which looks at a similar analysis but via the prism of leasing instead of construction. The study’s author has taken into account the following differences in regional leasing costs based on a 22,000 square foot facility:
Biotech Leasing Costs By City – 2007

Source: GEN, Sept. 2007 – extrapolation of data from Boyd Report
While I believe the above information that New York is the most expensive in this analysis, I find the real estate lease prices for Boston and San Diego to be incredibly low. To get these kinds of lease prices in Boston, you would need to find something considerably outside of Cambridge, or second- or third-generation space (meaning old and/or used, or perhaps a sub lease). Cambridge real estate lease prices today can more than double the above analysis. I think the New York prices are also very understated. Interestingly, the New York leasing prices don’t reference upstate New York, such as Westchester County, which houses a lot of biotech companies and where prices are probably somewhat more moderate.
In any event, let’s take a look at the full regional cost comparison using a leased-facility scenario.
Biotech Operating Costs by City – Leasing Model – 2007

Source: Genetic Engineering News, Sept. 2007
Prevailing wage
Once again, it must be noted that the prevailing costs of personnel are so dominant that the impact of real estate is almost negligible in the overall equation. I would like to point out that I think real estate price differences do have a larger impact than reflected above, as I reiterate that a 22,000-square-foot biotech facility is too small for a biotech company with 110 employees. A company of that size would need a larger facility, costing more.
In fact, I would suggest that such a company might need double the amount of space, particularly if wet lab space is involved. In this case, the disparities of actual real estate prices in different geographic regions would lead to a greater cost disparity between the coasts and the Midwest!
In summary, I think the Boyd study is a good start to look at regional costs of doing biotech business, but it is flawed in some of its key assumptions, including Canadian exchange rate versus the dollar. I have had the opportunity to travel fairly extensively to Toronto over the last number of years, and there is a first rate biotech community there with top biotech facilities, including the new MARs complex. While certain aspects of Canada are cheaper – salaries, for example – real estate is not one of them, including both personal and corporate.
What does make Canada a real bargain however are the incentives that the Canadian and regional governments provide to do R&D in Canada. The government rebates to companies a certain amount of R&D expenses in cash, making it attractive to perform R&D there and create R&D-related jobs. If you factor this element in, and the availability of top-notch R&D talent through excellent universities, this is certainly a Canadian biotech competitive advantage.
It is my assessment, when you take into account the above arguments, that the Midwest does have a significant cost advantage over either of the two coasts, certainly more than reflected in this study!
See you soon!
Previous articles by Michael Rosen
• Michael Rosen: Midwest nanotechnology whittles away at top states
• Michael Rosen: Where have all the “Searlies” gone? How transplanted employees shape a tech industry
• Michael Rosen: Venture capital flows to Midwest life sciences at record rate
• Michael Rosen: Nano prominence: Midwest doesn’t take back seat to coasts
• Michael Rosen: Midwest life science stocks kept sizzling in Q2
• Michael Rosen: The Right Brain: A neurological solution to the flattening world