2021 Global Life Sciences Sector Outlook

Chris de Pury

Hello everybody, just waiting a couple of minutes appreciate we starting a few minutes after the designated time, but as I was explaining to the panel, given it’s a real estate event always starts a few minutes after the designated time events start date, as people kind of suddenly realize what the time is. 

First of all, I should thank you all.  And we were also just saying that it’s a sign of the times that, and we're in a day and age where even the inventor of Zoom, I think has gotten Zoom fatigue.  So, I know after several long months of people sitting looking at screens, probably the last thing that you wanted to do is go on to another one, add to listening or watch these.  So, a huge thanks to those people who have tuned in.  If you're wondering who I am? I am Chris de Pury.  I head up Real Estate here at BCLP.  I suddenly realized as I walked in, that into a city kind of arrangement dressed in grey with a grey background and I’m in the office, extraordinary.  So, I’ve brought in something called a tie, just to kind of brighten it up a little bit.  And these are these things that we used to wear pre-Covid.  But this session, as you have seen, is not about looking backwards, this about looking forwards.  And in the world of meds, beds, and sheds, as I think it seemed to be commonly referred to in the industry and we're going to be concentrating on the meds and life sciences, thing at the moment and not just because of the Covid and pandemic.  Or is it?  One of the questions no doubt that will be discussed at some length over the next hour.  I am joined by a veritable cornucopia of life science talents from around the globe.  And I might take the opportunity to ask them just to introduce themselves and say a few words of their opponents.  So David, why don't we start with you. 

David Williams

Thanks Chris.  Afternoon everybody. Thanks for inviting me to take part.  Yes, I’m David Williams, I'm partner of Bidwells.  I'm sitting in Oxford or just outside there, around the Oxford, this afternoon and I am also head of the Science and Technology group in Bidwells.  We look after, I think it's 29 science campuses and innovation districts across the golden triangle.  And I principally look after the Oxford function so we've been pretty busy over the las 12 months, as you can imagine.  One of the things I am particularly involved with is Oxford Sciences innovation, which I have been helping on the strategic property sites.  They start in 2015.  So yeah at the cutting edge there.  Thank you.

Chris de Pury

Brilliant.  And Geraint?

Geraint Rees

Thanks very much Chris.  Lovely to be here.  My name is Geraint Rees.  Dean of Life Sciences at UCL.  I'm Pro Vice Provost for Artificial Intelligence there.  So UCL, as you probably know, is a global top 10 university.  It’s a large intensive research university particularly active in the life and medical sciences, turnover of 1.6 million at the moment.  I am also a non-executive director for our technology transfer company, UCL Business, that many of you will know.  And so I am familiar with UCL's Pipeline outs, commercial exploitation particularly of biologics and small molecules.  Thanks, great to be here.

Chris de Pury

Perfect.  I didn’t notice actually when I googled you, Geraint, if you're allowed to do that.  And on your CV, it says that you have published over 280 research papers that have been cited over 28,000 times, which I have to think is extraordinarily impressive.  So, I had some intellectual heavyweight up on the panel. 

And Matthew Powers… a few words from you.

Matthew Powers

Sure.  Thank you.  I am an Obligatory yank on the call.  Representing US life sciences here for sure.  I am the CEO of Nan Fung Life Sciences Real Estate.  We are a wholly owned subsidiary of Nan Fung Group out of Hong Kong.  I have spent my entire career in Life Sciences industry starting with a biotechnology company called Genzyme in 1995.  I've built over 5.5 million square feet of life science space across various BSL two labs, DNA Recombinant protein large scale biologics manufacturing.

Chris de Pury

Perfect.  So obviously we've representatives in Boston and obviously some of Matthew's colleagues from Hong Kong have stayed up late especially to make sure that Matthew doesn't give any way or too many of the secrets of Nan Fung's success away to the distance.  Klaus.

Klaus Betz-Vais

Thanks Chris. So, my name is Klaus Betz-Vais and I'm the obligatory banker on the panel, which is a caution and conservatism.  I run the global investors and advice business at Lloyds bank and we like lending against science blocks and Life Sciences like that.

Chris de Pury

Brilliant.  And last but not least, representing the home team, Liana.

Liana Hewson

Hi, my name is Liana Hewson.  I am a partner in the Real Estate department at BCLP.  I specialize in development, whether that’s big regions schemes, Kings Cross in Cambridge barking, as well as big development pre-labs.  I've work with the private sector as well as the public sector and the quasi-public sector, namely, a number of universities over the years.  So, have been, had exposure the knowledge economy, as well as the science elements and medical requirements and understanding what they need and how they interact with their partners, whether it be hospitals, in terms of their buildings.  Also being involved in a lot of big developments, opposite the tech guys, who over the years have decided that they need specialist requirements and it’s been really interesting to see what they have needed and how space and buildings have changed in order to adapt to that.  Then obviously, in this particular subject the life sciences have their own specialist requirements, and that's why it's fascinating to see where we go with this in relation to development going forward.

Chris de Pury

Okay.  Thanks Liana.  Just to kind of pick up housekeeping because we are getting a little bit of feedback on the channel.  Just put the panel on mute.  So, if you could just unmute as and when you need to speak and then go back onto mute when you come off.  It’s just the vagaries of WebEx, I'm afraid.  Just one other thought, thing, before we can get into the detail, the meat of the debate.  Is that if you have got questions, there should be a little bit of Q&A box on your IPads or your laptops or computers you can access and raise any questions.  I’ll try and pick them up and raise them as we go along.  So, because this is one of those things hosted by lawyers, we always like to start with definitions.  Because that’s how lawyers work.  And the great thing about the property industry is, it has a tendency to shoehorn everything into a position where it wants to do a deal.  It will find a way of doing it.  So let me start off with the definition of what life sciences is.  So again, our trusted google gave me a definition, which runs to several pages full of words that would probably get you huge amount of points if you were playing Scrabble.  But to the average Joe like me, you probably make little or no sense.  So with that, let me start off with David.  You’ve been selling, if you like Life Sciences tool in the real estate world.  What is Life Sciences, so that you can clear that kind of version up to start with. 

David Williams

Well we could easily spend an hour debating this quite honestly.  Yeah, you've asked a surveyor to answer this question, and I'm not a scientist, but I’ll give the answer from a real estate perspective.  Life Sciences is really an umbrella phase, it’s, we hear lots of terms used.  We hear health tech, med tech, biopharma, pharma, food technology, all sorts of different things used.  They are all really come under this.  I'm sure Geraint will metaphorically kick me under the WebEx table, but it’s essentially everything to do with living, living things.  So, bottling through to do all of the, in scientific terms. That's as scientific as I’m going to get.  Cause, I’ll get it wrong if I go anymore.  And I think, we for our purposes in real estate terms just split it down to three areas.  But first is bio pharma, and that’s bio-technology and pharma.  So, that’s everything from the bio techs' side to the drug discovery, therapeutics. So, obviously vaccine has been being heavily, heavily in the news, as we know.  Second one, I'm going rattle through this is, med tech.  So that's obviously, devices, diagnostics generally and then the third one that we split it into is Aquatech, so food, drought resistant, seeds resistance, box all those sorts of things.  And the thing in real estate terms is, is in the UK certainly.  I can speak of is that life science, organizations clustered together, you get this clustering around an anchor organization, which as we know, could be a university or academic organization, generally public sector, or an anchor private sector organization.  And that is seen around the UK in different locations, and certainly seen in Oxford and Cambridge.  It certainly so, but welcomed to you on campus as an example, you've got all the big part, you've got Steven edge, Edinburgh campus all around the UK.  So, the great thing about life sciences is that it is spread around the UK in different things.  And I think the other, the other exciting thing about life sciences.  Sorry I'm going in speed here, is the connectivity with other sectors outside purely life sciences.  So the really exciting thing that we get involved with is those grey areas where life science interacts with other sectors.  So it could be space and satellites, for example, it could be sensors and robotics, it could be, environment, energy.  All of those and many more that I can't immediately think off my head, but there are many that they interact with and that's where we're seeing in there in physical sciences, engineering, all those things and that's the really exciting thing.  And therefore, when you take that back to real estate, you start with the place-making part, which we all understand, and then you get down to the building science and building for what these organizations need in these particular clusters in these particular locations.  And, that's the, that's the really exciting thing I think because you have to understand the market and if you're in, if you're in an area that is particularly focused upon, I don't know, toxicology or oncology or something particularly focused. An area of life sciences focus, then you gear the real estate around that, getting it wrong is expensive, building labs is expensive.  You don't want to get it wrong and that's, I think that's the key, that's the key thing.

Chris de Pury

Just pick up on a couple of points and then some, some the others on the panel may have a view as well.  I get what that is.  Can I just test what, what is not, what was not talking about it?  If I go and buy an office, which was led for 25 years to AstraZeneca.  Just because it's lent to AstraZeneca and they use it as an office, is that life sciences?  Within the definition of what we're talking about just by virtue of the fact that it's AstraZeneca or Pfizer or GSK?

David Williams

My immediate reaction is that it depends where it is.  So if it's part of a science campus or science community, then absolutely yes, it's, it's all about what goes on inside of the building.

Chris de Pury

Okay.  And at the kind of other extreme, there was a few things there and going, you might have a view on this, is, where does life sciences stop and what we would probably call a knowledge economy start, or is it, if you drew a Venn diagram as to what people kind of refer to as the knowledge economy, life sciences is actually just part of that.  And so it's an adjunct to, I don't know, student health and at one extreme, education, Apple, Google, and all those kinds of arrangements.  Because I think, there's a little bit of a grey area there from what you just said.  Geraint, I don't know what your thoughts.  Are they obviously coming from, the kind of the more rounded look of it from the university kind of, campus type model.  Geraint, you, can you hear me?  It's on, I think it's still on mute.  Geraint can you hear me? Sounds like …

Matthew Powers

Yes, I think he stopped and got issues.

Chris de Pury

Okay. Some sounds like not, Matthew, from your point of view, from the U S kind of arrangements.  You've just talked about the, or David was talking about this whole hub campus.  The fact that it's synergistic with other things, which we'll come back to Geraint on.  You've kind of taken a view that it doesn't necessarily have to be based where everything else is based around those, but you can actually create your own, breakways.  So it's not necessarily that kind of location significant.  What what's, what's, what's your view on that?

Matthew Powers

It's an interesting question.  It's you know, I'll tell you, as you said at the start here, we're looking forward, not looking back, but this is one question in fact, where I think looking back is important and, and understanding the context of who's answering the question.  When I started with the Genzyme corporation in 1995, we were a bio-tech company.  And so, the life science industry did not exist then.  It was biotech, it was pharmaceuticals and it was vaccine.  And so if you think about that in the context of what has happened, right, it's largely service industries that want to gain in the different vertical integration growth of different sub-sectors of what we call life sciences today that have used this ambiguous term of life sciences to kind of capture everything and how does that impact real estate? What does that mean? So in fact, I think the context of the question is important because you could look at certain projects that are successful through those, we call micro-clusters here in the U S, and you might look at that as a simple one-off, but in fact, it might be a mini-cluster of a vertical segmentation of what we now call the life science industry.  And that could be its' own little ecosystem that's successful.  How that relates to a larger super cluster like we have here in Boston Cambridge is one of the most mature, life science clusters, is, as you described it in that Venn diagram, it can be inside that diagram, it can be a budding off of that main hub, but there is generally a tangential correlation amongst even micro-clusters to a larger cluster and that network.  And what you see is kind of the real estate traditionally here right now, what we see going back the last 25 years, particularly in our cluster is, reflective of where the industry has gone.  So we've gone through four cycles. You heard David used the term biopharma.  Many of us in the industry 20 years ago, didn't understand biopharma because biologics is so different from pharmaceutical.  There's really no real integration of business operations there of what happens on the science side and the commercial side.  But those companies come together, you have M & A activity, and that ultimately results in integrated real estate.  And so you have these different typologies of space that have to work together.  So, if your question about if it's office space led to Azed or Pfizer, we would not consider that life science based here in the US, even if it's in Kendall Square in Cambridge as a cluster, that's the office space.  So we really think about how we classify space, and a multidimensional approach, which starts with the topology of space.  And I won't bore you in the difference between biology and chemistry and all the like, but that's very important, but then how does that connect to, outside of it, insight to, and have it in the rest of the cluster and where that is. And that really has to do with how the industry works together.  And so without boring you with too much science about the different types of science that need to work together, as an example, in the drug development process, the criticality of animal research models and that type of space being readily available to general research labs and what you're seeing more prominently today with the development of personalized medicine and immunotherapeutic and cell and gene therapy, you're seeing the need for viral vector development and a like very much earlier in the process, which means you need to have essentially small scale commercial operations, much further upstream in the process, which relates in a very different type of real estate that's required to do that.  So there's a very complex kind of a nuance to what type of real estate and where it wants to be and what it's connected to.  And I think, I agree wholly with David understanding that it is, is of critical importance as we think about the investment we're making and what that growth looks like, sector by sector, cluster by cluster.

Chris de Pury

Perfect.  I think Geraint, going to you back with this, or is it still playing up?

Geraint Rees

Yes, I seem to be back, seeing that you promoted me to be the panelist from being a participant where I was before it booted me.

Chris de Pury

Unfortunately, it's not on, on texts life sciences this one.  So, and actually my technology would have been doing pretty much what I think you did was turn it off and turn it back on again, in relation to that.  We were just actually just examining with what, what following on from what David was saying.  And Matthew was saying from the kind of the U S perspective, we going to come back, and ask the question in a moment, Matthew, is that one you always hate about, how you resurrect Kendall Square over here and do those kind of things.  But and just do annoy you, if nothing else.  It's just come back to that, the campus point Geraint, about, life sciences being part of a much wider picture of that knowledge economy, clustered around technically, I suppose, all traditionally around universities or around teaching hospitals and such the like, and whether this is just, you know, a small subset of that much wider ecosystem.  To be interested in your perspective on that, having lived with it and breathe it for quite a long period of time.

Geraint Rees

Yeah.  I think he's exactly right that it's a small subset of a big ecosystem and there are variants and different things, but usually from, from certainly my perspective, the anchor partner in an ecosystem is going to be up either university or some form of major research Institute, either associated with a pharmaceutical company or some other area of the biopharma Medtech Agritech business.  What, what we're interested in doing though as universities and as universities associated like mine is with major, teaching hospitals, is creating a much or being part of a much broader ecosystem, companies, large and small, lots of different spaces, including spaces for, early phase start-ups, spaces that accommodate scale-up, spaces that can ultimately accommodate fully fledged businesses.  So, what we try to do at our site is obviously originate some of the best ideas, and work with commercial partners to try to create a pipeline out from our ideas to commercial exploitation and ultimately, of course, in our case to IPOs.  So we've had, I think, I think we're in our fifth IPO now in the last few years, we've had a very successful run, in the biologic therapist space.  So that's, immunotherapies for cancer car T-cell therapy and things like that companies like Achilles and Autolus MeiraGTx.  So as a university, we're in the business of trying to encourage that kind of an ecosystem through what we do, but we're quite clear we can't do it all ourselves and we need to be located in parts of the world where there's this very vibrant ecosystem of all sorts of players as they interact together.   Back to you Chris.

Chris de Pury

Yeah, that's interesting.  Klaus, can I pick up on something that we're starting to examine here? We've moved away from me being blunt about a 25 year lease to AstraZeneca, where you can see that, where the covenant is and to be honest, the location probably is subservient to that. To almost the kind of service labs type model, which you can see, you know, service offices have done it, student housing has done it.  And gone are the days where you just take a, you know, an overriding lease from the university.  But how are you as a banker looking at that kind of covenant risk? Cause it, you know, what are you looking for principally around valuation?

Klaus Betz-Vais

Thanks Chris.  So, I'd say there are two angles that we, we tend to look at it from.  One is, what is the, what does the red role look like in terms of its, diversity diversification, spread of, you know, lease, leasing events, et cetera.  And for that, as much as stocks tend to lend themselves quite positively to that kind of analysis, because they do tend to come in clusters.  They all kind of areas which tract, kind of tenants all the way from kind of, you know, you'll very small fledgling to three rounds starts off, all the way up to some of the bigger players who quite like to be in those locations because they have access and interaction with potentially some of the companies that they may one day end up buying in order to deliver their, for example, their drug pipelines.  So from that perspective, it does, it does tend to look quite good and we find the schemes that are most successful and the ones that we are keenest to fund actually have that falling dolls approach to managing their rent role within that business plans.  So they will have some incubator space, which is available and sort of, you know, short lets we'll licenses to attract the kind of the, you know, the very early install heavy start-ups, and then, as those outdated companies grow and develop, they'll be able to kind of move them around the scheme into areas that, you know, look a little bit more traditional from a real estate perspective.  So, you know, you can expect to see a three or five year lease, right up to being able to accommodate requirements of sort of tens to thousands of square feet.  So that, that was pretty well.  The bit that is always the bit that is always quite interesting is, though from the, from kind of an analysis of the underlying tenants from a financial perspective, because, you know, as a banker, you're always trained to kind of, you know, look, don't just look at the balance sheet, look at kind of, you know, the P and L, the sales track record, grades rate, cash conversion ratios and all the rest of that.  And most of these occupies, don't actually have that.  They tend to be companies that are kind of fairly R and D heavy and culturally, they will be kind of net users of cash, albeit pretty well capitalized through, kind of venture/opportunistic investors.  So you kind of got to get your head around that.  But assuming you can, and assuming you are working with an acquirer or an owner who's maintained pretty good data historically around things like occupancy, tenant failure, tenant turnover, the ability, and their ability to retain, kind of a die-hard tenant in the scheme, and grow them, it does, it does give you a certainly as lead, it does give you comfort that, you know, occupancy tends to be pretty good, notwithstanding the underlying covenant strength.  And it also does give you a lot of comfort that the tenants do tend to pay their rent, because they do tend to be quite well capitalized, at least from a cash perspective.

Chris de Pury

Doesn't that kind of start to lend itself, lend itself, excuse the pun, but actually lead you to say that you would only ever lend on an existing scheme, which has got that provenance, and you've got that track record.  But if this is supposed to be a growing sector, what about new stock?  Is that have to be done by equity with you refinancing once you've got some kind of stabilized income or how does that work?

Klaus Betz-Vais

I think that's broadly correct, and I didn't even that's necessarily something that is specific to the life sciences sector.  I think ever since the, ever since the GFC banks have become ever more highly regulated, but all sorts of good reasons.  And one of the things that regulators don't like to see as a whole later expectancy development lending, because that's where a lot of people came on stop last time.  So whether it's, you know, life sciences, scheme and office building, or a logistics shed, if you are a borrower and you are looking to get effectively speculative development finance, going to a bank is probably not, should probably shouldn't be your first port of call. It's either equity or it's kind of alternative to debt capital.  So, funds or perhaps institutions who were active in the equity space and who cand potentially take a little bit of a different view because they tend to be a little bit less regulated.  And perhaps also have, have point of the experience in the sector that lenders perhaps don't have.  There's certainly a, obviously the world is changing, but historically, certainly in the UK, that hasn't been a huge amount of liquidity in the debt market from what I would say mainstream lenders for life sciences and science box, and yeah, as I said, you know, the world is changing rapidly.  So I think that liquidity is coming on stream pretty quickly, but that is very much still in the investor's space rather than for development finance. 

Chris de Pury

So, so let me pick up on that.  The kind of, which is the biggest question.  Did the life sciences start at the beginning of the pandemic because he put it on the map and someone decided to sell Harwell.  But actually before that Harwell found itself very difficult to fund.  And actually you just said why, because you haven't got that track record.  So, is this just a flash in the pan because people don't want to put their money into retail or to offices.  Matthew, why didn't you pick that one up. Bearing in mind that you've seen the development of, you know, from the US point of view, why now for the UK?

Matthew Powers

Yeah, it's a great question, Chris.  And I think, so I think that, it can be both a flash in the pan and also a catalyst of a longer term trend and growth for the sector.  And, you know, when you look at kind of the success of the clusters here in the US, there's, there was a catalyzing moment there as well, and we've seen kind of exponential growth from kind of 2005 on, and without going into too much detail, what that means specifically, when we look at the UK for Nan Fung, life sciences real estate, we see the stage of, you know, kind of the overall cluster and let's refer specifically kind of the golden triangle.  We think that's kind of where the Boston Cambridge cluster was kind of circuit 2003, 2004.  And so when I say it can be both a flash in the pan and the start of a longer term trend for all the reasons we just talked about moments ago, there's going to be winners and losers.  There's going to be people as you suggest moving, or feel they're overweighted in retail or hotels, and we'll look to shift into life sciences because they see this as an attractive sector.  But there's so much nuance that there will be winners and losers.  Not just because you build a very nice looking lab, building that on paper has the right floor to ceiling height and amount of HVAC and MEP and the like, does not mean it will be a successful life science building.  On the other hand, we do believe that there's a growth opportunity in the sector, maybe not at the same exponential rate that we've seen here in Boston, Cambridge over the last 15 years, but we do think there's a longer-term trend for growth and much of this has to do the work, with the work that our fellow panelist here, the esteemed Mr. Rees has been doing and commercializing IP.  And that's a really key component when you really look to the, what catalyzed a lot of success here, is having multi-generational serial entrepreneurs, starting life science companies that feed larger companies.  So when we talked about the M and A activity and that combination of biotech and pharma.  Again, I won't bore you with great detail, but these are exogenous factors that impact life sciences real estate, the simple timeline.  And I'll just speak specifically to the US, so what you get for exclusivity for a pharmaceutical product versus a biologic, incentivizes pharmaceutical companies to acquire a biological company or biological assets because of the longer duration they have.  So that's how you Stem the ebbing tide of valuation.  So you have these exogenous factors impacting the industry itself, which translates into a real estate need.  And so what that means is that over the long term with the work you're seeing Geraint and his colleagues doing today, is going to lead to success 10 - 15 years down the road.  And it's a global economy.  So the Pfizer, the Azed, the Novartis, while they have a huge presence here in the US right, there is a bit of an arms race.  So you need to look to other areas and in great academic institutions and serial entrepreneurs to be able to continue to successfully build out that long-term pipeline.  So, so we're, we're bullish on the UK, and we see that it's, it's really on the threshold of an interesting period of growth.  So,….

Chris De Pury

Hold.  Can I just pick up something and Dave, you might have view that.  10 - 15 years, you know, we've grown up in a world where I suppose the last 20, 30 years where the real estate world has tended to be quite short term. So if you said to the average IRR driven investor that they've got to wage or amortize, they were, you know, to get returns over a 10 - 15 year life cycle?  I suspect they'd look for something else.  I don't know. I kind of had that fear, especially when perhaps they won't lend to them until they've got a kind of a track record, and they've got to use all that kind of equity.  So you're starting to see a relatively tight amount of equity that will go into it, which has got that patience and the ability to actually look in the long-term.  Is that, is that, is that right?  Is this kind of, for kind of a value add type investor who's saying actually developing a life science is actually is the wrong place for them to be.  I don't know, David, what are you seeing out there in terms of the investor appetite?

David Williams

The investor appetite in where, where we work across the, across the golden triangle is enormous.  Absolutely enormous.  And why is that? They see the, there is the ability to push rent significantly, there's the, there is the ability to really drive bad news up.  And this is, this is all coming from the growth, not just in life sciences.  And it's important that I know we're talking about life sciences now, but talking about life sciences alongside the other sectors, and certainly where, where, where we're working.  There is this, it is all connected, and we'd have to look at that.  We can't just look at life sciences in isolation.  And I guess over the, I mean, the real game changer in Oxford was the formation of Oxford's sciences innovation.  Why was it a game changer?  Because, because it brought in a 600 million pound funds, and we've seen this, you know, something like two spin outs formed a month, something like that and this is an inward investment, absolutely pouring in.  And you look at the take-up stats, you look at the rental growth stats, and it's just knocked it out of the park.  It's quite extraordinary.  So, you've seen the Bonilla office and the Bonilla industrial stock repurposed all these sector, which is where the demand is from.  And that's what's driven rents suffrage.  Puts voids down, it push yields down.  So, everybody wants to get in on the action and, you know, you look at well, 290 million pounds was traded last year, I think on property investments deals.  And around also that's what's driving it.  Last year, I think what, I think the portfolio, this is the universities, put out portfolio, I think something like a billion pounds of raise.  Companies we are tracking what about 1.3 to 4 billion has been raised year to date at the moment and 70% of that is life sciences.  So life sciences absolutely core are of this, and that's, it is not a question in the past, absolutely not and.  And you look at the forward projection that the university and OSI and OUI are making, and this is, this is, you know, significantly more money is going to be raised and more unicorns creates it.  And that's what this is all about.  It's hugely, exciting.

Geraint Rees

So Chris.  If I can jump in there for a mo…

Chris De Pury

Yeah, I was going to say the

Geraint Rees

Well, the 10 to 15 years for me is what was, what was happening 10 to 15 years ago in universities, because of course that, that there is a timeframe here where we've been building a pipeline that is now emerging, and some of it's getting to IPO. And it's that now emerging.  That's the bit we were talking about, that's the bit that's going to need the incubators, the scale-up capital, the extra space and that sort of stuff.  So, I think there's a mistake to see 10 to 15 years as the duration of your investment.  A lot of that is happening in universities.  So what you've got to do, I think is look back at which UK universities have been doing. Oxford's one.  Ours, I believe is another.  There are others, as well, and we've all we're, we're, we're in this for the long-term.  So the stuff that's becoming the autologous of today, the 10 to 15 years ago, it was some T-cell receptor work in a laboratory.  There's a whole pipeline of stuff moving down after that.  And we're looking also, as David was alluding to, you know, the med tech sector of course, is very big. And with advances in AI and our computer science, we're looking at sort of hybridizing the research we're doing between health and AI and life sciences and exploiting that.  And so thinking about investing.   I think, you know, my suggestion here is this is ecosystems you've got for have that maturing pipeline of stuff emerging from research institutes and universities. And that's the kind of thing we're trying to create in my university with my tech, the technology transfer company I work for.

Chris De Pury

And speaking on one of the earlier comments you were making around that, of those, we've come to tended to talk about these, the two professors inventing something and for everyone that does something probably there's two or three that failed or whatever, and then suddenly it balloons, and then they need more space.  They need to expand and develop those kinds of arrangements.  Traditionally, and it's maybe anecdotally, as soon as they got to that next stage, they've gone to the states because the venture capitalist model means that that'd be a lot more investment there.  They'd been allowed to expand, or then when they go to manufacture, up until very recently, they've gone to India or somewhere like that to actually produce. So, the view was, I suspect that what's the point.  We were very, very good at excuse the expression, incubating and coming up all the ideas, but no one would ever kind of to expand it and get those, those covenants and get that providence and build those campuses took us a lot longer because people were going off to Boston.  Well, what's your thought on that?  Are those IPO peoples actually staying and expanding here?

Geraint Rees

So the answer is increasingly yes. I think it's fair to say the UK, in my view has a problem with scale-up capital, in particular, but that's the mid-size companies, but then you get companies, for example, in the tech space, like DeepMind that have exception said they wish to stay here, because of the particular nexus of universities, particularly in the golden triangle, but not exclusively. The other thing in the life sciences sectors, we've got very good clinical trials capability. You've seen that, for example in the pandemic with the recovery trial run out of Oxford, but national in terms of its reach, that's the trial that developed all these therapies or discovered that dexamethazone works.  And that hydroxychloroquine doesn't.  That is a kind of infrastructure, which is very deployable for many of these companies that are now at the point of getting to FDA approval or these kinds of things, they need those kinds of trial infrastructures to generate.

And finally, we also have assets in some parts of the UK that are globally unique.  For example, in my neck of the woods, great Ormond Street Children's Hospital is really quite prominent in biological therapies for rare inherited disorders.  These are incredibly rare to get treated at that hospital.  Researchers are interested in those, and those have the potential to create a cure essentially for an incredibly rare disease.  So, there's a small number of individuals with that disease worldwide, but the actual potential value of the therapeutic is very high per individual.  So, I think while we shouldn't be complacent, and there's quite a lot of work to be done by UK PLC in making it a more attractive place to stay, it's a good platform.  I believe the UK for life sciences to create global treatments or global or whatever you're interested in.  So that that's the way I see it.  I mean, we are playing our bit in that broader ecosystem, both to lobby and to encourage and to facilitate that kind of work.  And it is two professors inventing things, but of course, plenty of our professors don't invent stuff at all.

Chris De Pury

Yeah

Geraint Rees

And that's fine.

Chris De Pury

I was just going to come back with being unashamedly quite London, Oxford, a little bit of Cambridge.  I'm an old Oxford man, so I can kind of push that down a little bit down then.  So, they kind of push that down the line, but for that one side, but I'm sure there were others, people from mainly Bruntwood, who'd be sitting there saying, hold on a minute, it's not just about London, Oxford, and Cambridge.  And now that you've been obviously doing a lot of developments in London, but also with, as a group doing quite of outside that and with the kind of the price pressures on Cambridge and Oxford and London.  And dare I say it with announcements going on the budget that leveling up and pushing money out into the regions, do we not think that there's actually quite a lot of opportunities to replicate this in less expensive areas, which, you know, is going to be kind of government backing and beyond?  Have you seen some of the other clients, not on this panel, what their viewing and clouds you've probably got, got a lot of visibility of that with them, people asking for term sheets?

Liana Hewson

I think there is.  Maybe think about region and what the government is trying to do to make it not a UK PLC, not so reliant on the south and pushing money up north.  There are opportunities and the cluster point about having, you know, an area where people want to go and you have an anchor, you know, region often has various anchors, can it be a life science tenant? Do you have to create that, or how does that come about?  And it's linking obviously being next to universities, but I think the government has a role to play in that in leveling up.  Query, whether leveling up means just removing funds from London and the triangle to other areas.  It, I think the question comes down to the development aspects and the life sciences and what you've talked about is it a building that happens to have a tenant that's life sciences, the actual life science requirements for buildings from, you know, what I understand can vary enormously and very bespoke to certain tenants.  And the question is how, how do developers who want traditionally in that sector going to the flash in the pan point.  Are they now looking at this opportunity because it's come to light over the last year and suddenly going to go, oh, I'm a developer, or I can do that.  Well, if you look at, to be honest, what some of the barriers to entry that, if you're looking at it, analyzing it, you know, adapting, technical requirements.  The life science entity also has a life cycle, which is more unusual to an office tenant in terms of their demands in years, one to three, three to five or a seven to 10, which is probably the longer term, class touched on in terms of licenses, short-term/long-term.  How does that work and how does a developer who isn't necessarily used to this, bring that to life, and what are the costs when you look at the legals or who pays per fit out?  Are there big landlord allowances to assist on that? How do you deal with yielded reinstatement elapsed?  Who pays for that if you're trying to be flexible and you want A Tenant that moves, you know, every two years? So, some of those entries, cause not only is their technical requirements flexible, they expand quite quickly in terms of, they might start with four or five people and then in a year or two there's 20, 25, how do the buildings deal with that?  And we know that flexible working in the office space, you know, the way you worked, et cetera, you've got that, but the tech space, you've got to add that extra layer of the building specific requirements.  And I've seen it over recent years as to what the big tech guys want.  And as they got more sophisticated, the needs and having worked with the universities, energy backup, you know, the cost of ensuring that, you know, their clinical trials, you know, the power doesn't go down, having that, the cost of that.  There are so many of these added elements that I don't think a developer, you know, in the normal real estate ….

Chris De Pury

Let me pick up on that.  It's a comment that David also made about.  And I thought that Geraint if, could probably was, couldn't hear at that point.  So it's be an interesting comment that.  Your compression takes you so far, but then it's driving rents.  And the poor old person is having to actually pay larger, larger rents and presumably, Matthew, what is the business model?  The business model seems to be that these folk coming in want specialist lab arrangements.  They want to be in clusters with other people.  They don't want to be putting their life savings into doing a fix out, which presumably takes, I don't know, months, if not years, to get that bespoke arrangements. But the only way they can do it is being stuffed with a high rent.  Is that the best way of doing it?  Over a relatively short period?  So presumably it doubles up again in relation to that, is that the business model?

Matthew Powers

It's an interesting question.  It's unfortunately what you see in certain clusters, specifically here in the U S.  We have a specific, and we think unique business model that we employ here at Nan Fung Life Sciences Real Estate, where we actually execute with our own equity turnkey, build out a space for the tenants, which saves tremendous capital upfront.  Our project saves our tenants roughly four and a half to $5 million.  To your question earlier about companies staying in the UK, you know, right now there, there's a challenge and it's, I think it's a challenge to the future success of the cluster in just terms of valuation. A blue chip kind of series a round in the U S is going to raise about a hundred million USD and in the UK, it's about 30 to 35 million.  So there's a price differentiation.  But if you think about that, if you, as a developer, as a landlord, have confidence and strong conviction that you know, what that company needs, as well as, and hopefully better than they do, and you know how to design and build that for them.  If you can save them 10% of the capital that they raised, you become a partner in the industry.  You become one of the largest investors actually in that company indirectly because of the capital you're saving them.  That allows them longer runway, which is really key in our business for these companies.  More time means more time to discover science, increased valuation for the company and a longer opportunity for strategic exit.  So it's a real game changer and a real differentiator.  Unfortunately, there are many areas where that's not an option.  We think we're unique in what we do, and unfortunately does result in not only higher rent, but also these companies have to invest their capital into somebody else's assets, that they never recouped.  Right. They're putting their own money into someone else's project.  So that's the balance between the TI allowance and the cost of the build-out and what the impact is to the tenant.

Chris De Pury

Interesting.  Klaus. What's, what's your, what's your take on it when you're looking at that, is that, you know, is the, the rental growth, one of the key things, your engine, I mean, it's interesting, it's not just life sciences now.  One of the things that's happening across the industry is the old landlord cutting four rent checks every, you know, every year and waiting for an event in 10 years' time, that seems to have gone by the board.  And there's a lot more integration between, dare I say it, real estate being a service industry, and far more than just than providing the bricks and mortar.  And I think that's what you're saying is a differentiator from what you've been doing in Boston.  But how do you, how do you view that from a banking point of view Klaus?

Klaus Betz-Vais

Yeah, Chris, I think that perhaps that actually correct.  I think, for us as a lender and DNA, especially given the yields, these assets have historically traded that, a rental grade is less of a concern because in terms of some kind of the metrics that we look at from a debt perspective, whether it's, you know, ICR yield on the LTV, et cetera, everything tends to look quite good day one.  So, we don't really need to underwrite a lot of Brentwood Roads to get ourselves comfortable that the debt will be serviced and that there are beautiful specs of repayment or refinancing, actually look at maturity.  Where the challenge tends to lie is around things like the Walt and effectively the reletting risk on the assets.  And that's where it's actually critical with the owner is experienced in terms of what they're doing.  They understand the needs of their tenants. They understand what the trends in the industries that they are catering to are, so that they're able to continuously upgrade their assets and ensure that they are relevant for the occupier base.  And that requires quite lots of cut backs. So, one thing we will stress quite a lot when we look at a lending propositions is, not only is the asset manager experienced, not only, you know, what is their track record in terms of occupancy, et cetera, but do they have the financial resources available to them to continue to improve and develop the underlying proxies over the period of the loan, which let's call it three to five years, when things might change much change quite a bit, because if you've got the, if you've got the right product, and I think we will probably agree that there is an under supply for the right product in the UK for the tenant demand, then you will continue to keep it light, and even if, you know, the wall looks a little bit on the short side, there's nothing from a lender perspective to worry about.

So a lot, in a lot of the lending we do, you do tend to see the loans being a little bit more complex around some of the covenant requirements.  And also the fact that we will often sort of stick, you know, a capex tranche next to an investment tranche, rather than it being kind of the more traditional lending that you would expect banks to do, which is a sort of, here's an investment loan/RCF, lock it away and, you know, we can have a chat in three years when it comes time to refinance.

Chris De Pury

Is it interesting?  It's funny enough.  I've got three questions and just about exactly what you've said, Klaus.  You're all emailing me at the same time, but they're all saying, we've all talked about the fact that we've had talent.  That we've got a great provenance and track record in life sciences, but there's a complete lack of supply.  And suddenly there's all this capital gain. Why is there a lack of supply?  Is suddenly somebody woken up and going, oh, look, there's a pandemic.  Is it caused by the pandemic?  Probably not, because these trends are already there.  So why now, why Matthew?  Why have you decided to actually now's a good time the UK.  You know, you've gone, you spent time here before, you've seen what's going on down for mostly got chewed provenance in Asia.  You've gone to the U S sitting there. Why now grant, you've been doing it for the, you know, the generations in terms of the, you know, in terms of what the cycle more recent arrangements.  So why is it suddenly, is it because there's nothing else to invest in?  And suddenly people are thinking like, it's last man standing and who wants to take that one on?  And the, and the guess as to why suddenly this is the flavor of the moment?

Matthew Powers

Well, from a university perspective, we've been building hard over the last 10 to 15 years to change the internal culture.  The art Deere that might be so prevalent in some people's minds, even some politicians, minds of universities, these ivory towers were absent minded professors just spend that time doodling around.  Irrevocably changed quite some time ago.  We still have a few of those.  And occasionally I like to do a bit of that myself, but the engagement with the outside world, the positive impulse to transform the world in a positive way is back with a vengeance.  It's just taken a bit of time to change that culture to generate all of the basic fundamental sciences and build up that head of steam that you're now seeing emerging.  So that's my answer from a universe director of wine now.  And I think the pandemic is just a sort of catalytic factor in the sense that, you know, at one level, the pandemic from my faculty is a lot of people saying told you so. 

I have people who for the last 20 years have been writing papers saying, do you know what, this climate change thing, that's driving biodiversity loss and population movement, it's going to make these kinds of bats come into contact with humans.  And we kind of all to watch out for that because they're a big reservoir of viral disease.  And everyone was like, yeah, yeah, yeah.  I don't think anyone's yeah, yeah, yeah anymore.  The world having been shut down and we're all living on the Teams or Zoom or WebEx, but I think the catalytic thing of it is it has also exposed some of the potential and capability of the UK sector in particular.  So the UK does half the world's genomic sequencing, right.  And that's a major contribution to the pandemic. All the treatments have basically been discovered in the UK and the UK is a major contributor to the vaccine rollout.  So it's not so much about, and you need to invest in that.  It's more, I think that that shines a spotlight on exactly what that capability can do.  You know, it's out there waiting ….

Chris De Pury

Yeah and I would think

Matthew Powers

for now, the investment's going to transmit

David Williams

I agree with what Geraint, I agree with what Geraint saying.  In fact, we made the decision to expand into the UK pre pandemic.  And I would make the argument that COVID has potentially negatively impacted that in a sense that the US government has invested nearly a trillion dollars into COVID research and advancement.  And there's a trickle-down effect there, right? That filters throughout the rest of the industry in R and D in general.  And I think many institutional investors see this as a great time to be investing in the US, much like clouds. We're very risk averse.  And, you know, with the amount of money coming in from the US government into the industry, which filters through these companies, it just provides more securitization, longer runways. But we had already made the decision pre pandemic to expand in the UK for all the reasons Geraint is talking about.  All of those factors.

When I talked about this being, you know, 10 to 15 year growth, I'm talking about getting to a fully mature, independent cluster.  Fully integrated, not reliant, as you said, with series A companies going to the US people, staying home, having a full vertical integration from, you know, pre-phase one, preclinical, all the way through commercial operations, all self-contained within a cluster that manages itself with serial entrepreneurship and activity. So, that's a fully sustaining mature cluster by my definition.  And that doesn't happen overnight.  And if you, if you go by what Geraint is saying, which I agree, with it started 15 years ago, and it's 15 years away from getting there. And it's probably a 30 year cycle in fact, to get there.  That doesn't mean that there's not a lot of successful real estate projects and very specific sub sectors between now and then, but that's how you get to a successful cluster

Chris De Pury

So I'm just conscious of time and I'm done.  I just want to ask one last question to each of you in turn. I'm going to ask Klaus halfway through involved in kind of, because these answers are new what are going to come out.  If I gave you each a hundred million pounds and said, right, you can invest into life sciences.  You can't go off and buy a yacht and girls in south France.  So you've got this hundred million pounds and you want to put it into the life science sectors now.  And I'm just, the reason why I've asked Klaus to kind of look at it from a different point of views is, I'm going to ask him to look at it from a short term, how I make, you know, I'm not waiting 15 years or 20 years or 30 years, but where would you put your, put your money again, David, why don't we start with you, which is free investment advice going on now here.

David Williams

Would split it between therapeutics and diagnostics.

Chris De Pury

And what in terms of geography. 

David Williams

Right.

Chris De Pury

Inside the triangle?

David Williams

I don't know because I know that's the area that I know and the companies that I know very well. 

Chris De Pury

Excellent.  Liana where would you put your money?  Us lawyers don't usually part with money very easily as you know.

Liana Hewson

But we don't.  That's certainly a good question, right?  I would be looking outside,  I think of the triangle and looking in the other areas that are popping up because of the, as we've talked about the government, government position, and regions getting, looking at opportunities there where you can bring in the whole area.  I think the culture's changing.  I think if you look at key attributes of what life sciences, one is very similar, to be honest, what a lot of the other cultures attack, the staff wanted. Therefore, I think the region scheme somewhere around one of the hubs, but not one of the prime locations, because I think you will get the grants and the incentives and the suit, the super tax subsidies and things like that.  So I think I would look outside to try and then rival maybe some of the golden triangle, but as a….

Chris De Pury

You would certainly speculate.  I won't be long before Elon Musk starts kind of muscling it into the area, or you start having kind of, I don't know, Dr. Google or Apple starting to actually kind of do to back kind of vaccines.  And Klaus, short-term money.  How do I get two times equitable to form five years, 20% plus IRRs?

Klaus Betz-Vais

Very straightforward.  I would buy a portfolio of smaller regional schemes, probably unloved, stick them all together, called a platform and then sell, sell it to somebody who needs to spend a lot of money quickly.

Chris De Pury

Perfect. [Laughter] Matthew?

Matthew Powers

I think I'm more conservative than Klaus, certainly more so than Liana.  I'd put it under the mattress for the next 60 days until we know what's going to happen with interest rates and currency valuation, and we get a better sense of that.  Come back and I would probably invest in something that Klaus is bringing through the IPO.  But all kidding aside, you know, we're heavily focused in the triangle and kind of the more mature components of the triangle in those key adjacencies that both David and Geraint referred to as being of critical importance.

Chris De Pury

Perfect.  And you've noticed I've deliberately avoided coming back to the Kendall Square question.  So we'll move on.  I'll get the last word to Geraint, because fundamentally like all good real estate arrangements, unless you've got occupies who were expanding and being invested into, then it doesn't really matter whether you've got a state of the art building, because there's actually no one to actually have to buy and pay the rent.  So Geraint, where would you, what would you do with your a hundred million?

Geraint Rees

So, it's not London versus the regions.  I think that's wrong, it's both, but they have different capabilities.  London has the potential on the Southeast to become a global supercluster like Matthew has been talking about.  With respect, the regions do not yet have that, but they have many, many opportunities, both for making money and for doing wonderful life sciences. But I would put all of the money into some converted office space to make some incubator space on the Euston Road, because London has the potential to become a global supercluster on Matthew's 30 year plan.  And that's what we're committed to.

Chris De Pury

Perfect.  And with that, with everyone doogling or whatever at what's for sale on the Euston Road.  Thank you very much.  It's been very enjoyable and very thought provoking.  And, we'll see where we are in a few months' time, I suspect cause the market is moving that quickly.  So behalf of BCLP, thanks to everyone for tuning in.  If you still use that expression. And thank you to our panelist.  Thank you all.

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