Biotech Cities: A Conversation With Alexandria CEO Joel Marcus

Alexandria Real Estate Equities is the largest life science landlord in the US, but it also has a five-member venture team and more than 300 investments on its ledger, mainly in biotherapeutics. Alexandria CEO Joel Marcus discusses the firm's hush-hush portfolio and the evolution of life science workplaces.

• Alexandria has invested $140 million in more than 300 companies since 1996. Only a few dozen are publicly disclosed, including recent IPO candidates Genocea Biosciences Inc. and Intra-Cellular Therapies Inc.
• Just 15% of Alexandria's investment dollars are in its own tenants, and it limits total investment in a company at $5 million.
• Alexandria is capitalizing on the recent trend of young professionals moving back to urban centers, concentrating more of its holdings in a few key biotech neighborhoods such as San Francisco's Mission Bay and Cambridge's Kendall Square.
• The life science labs of the next few decades have to be more flexible, both "dry and wet," says Marcus, as the world moves toward a convergence of engineering and biology.

In January, the digital health incubator Rock Health celebrated the opening of its new space in San Francisco's Mission Bay neighborhood, where a biotech and health care community anchored by the University of California, San Francisco has grown – and continues to grow – across one square bayfront mile that for decades held warehouses and train yards. Helping Rock Health cut the ribbon was Joel Marcus, CEO of Alexandria Real Estate Equities Inc., which owns four buildings in Mission Bay, including the one that houses Rock Health's new digs. (The main tenant of the building is Bayer AG's US Innovation Center.)

Marcus, previously a real-estate accountant and biopharma attorney, co-founded Alexandria in 1994. Except for some high-tech clients – most famously Google Inc. – Alexandria rents mainly to companies, academics and government groups in the life and agricultural sciences. It leases 17 million square feet of office and lab space concentrated in seven US metro areas, plus Canada, India, and China, with nearly two million more in development. The firm is also a frequent biotech investor, with about $140 million disbursed across nearly two decades. Its venture group, led by Amanda Cashin, PhD, has five people. The bulk of its more than 300 investments have remained undisclosed; the firm says its realized returns are "in the double digits." (Numbers are impossible to confirm independently, as most of Alexandria's investments, even those disclosed, are below the reporting threshold.)

We sat down with Joel Marcus at the Rock Health party to talk about his landlord's eye view of the life sciences and Alexandria's investment strategy.

START-UP: You've been doing biotech investments nearly as long as you've been doing real estate.

JOEL MARCUS: Since 1996. We've probably made over 300 investments total. We've invested heavily in life science, some technology, some industrial biotech. We've done diagnostics, and some health services, but the dominant portion is therapeutics. We have a scientific team led by Amanda Cashin [PhD]. I am pretty involved, too, because I used to do that work. Only about 15% of our investment [dollars] are in our tenants. The rest are non-tenants. It's done to maintain a competitive leading-edge knowledge of where the science is going. That's really the main reason. And then return on investment is high up there. We generally won't identify what investments we've made. It may come out like Atara Biotherapeutics [Atara BiotherapeuticsInc.] or Boston Biomedical [Boston BiomedicalInc., a division of Sumitomo Dainippon Pharma Co. Ltd.]. [See Deal] (See Exhibit 1.) But usually we consider it secret.

Joel Marcus

SU: Why the secrecy? VCs are happy to talk about their investments.

JM: It's competitive, it's know-how. And we just like to keep a low profile.

SU: Why is it important to know where the science is going?

JM: We want to know the next great companies because they're likely to be clients of ours. And we want to know what areas they're focused in and what kinds of infrastructure they're likely to want and need. It's a great leading-edge indicator. But it's only about 1% to 2% of our assets. We're an $8 billion company. It's a minor part, but it's strategic and crucial.

Exhibit 1

Selected Alexandria Biotech Investments

Company	Exit opportunity	Board Seat	Alexandria Tenant
Boston Biomedical	Acquired by Dainippon Sumitomo Pharma, 2012	Yes	No
Genocea Biosciences	IPO, 2014	No	No
Hypnion	Acquired by Eli Lilly, 2007	No	No
Intra-Cellular Therapies	Public via reverse merger, 2013; moved from OTC to Nasdaq, 2014	Yes	No
Macrogenics	IPO, 2013	No	No
MAP Pharmaceuticals	IPO, 2007; Acquired by Allergan, 2013	No	Yes
Salmedix	Acquired by Cephalon, 2005	No	No
Sirtris Pharmaceuticals	IPO, 2007; Acquired by GSK, 2008	No	Yes

START-UP found 38 disclosed Alexandria biotech investments, 22 of which at one point were Alexandria tenants. The ones listed above were among a dozen to reach an exit opportunity. The 38 disclosed investments include 12 that came through Seattle incubator Accelerator Corp., of which Alexandria is a co-founder.

Strategic Transactions; Company information; SEC filings; Accelerator Corp.

SU: How do you decide which tenants to invest in?

JM: It's pretty easy, when you see a big idea, big market opportunity, stupendous management, and pretty good syndicate, and you've got an unmet need and essentially some kind of blocking path situation. Those are the ones we tend to gravitate toward. We're always focused on whether there's a great management team, that's probably the most important thing. If you want an example, but not a tenant: back in '07 we helped start Boston Biomedical; we were one of only two investors over the course of the investment, only ourselves and Mitsui Ventures [Mitsui & Co. Venture Partners Inc.]. It was [one of] the first cancer stem cell [companies]. The exit was $2.6 billion, only about five years after they started. [The upfront payment was $200 million; Alexandria says it has already earned a first milestone and expects all others to be achieved.] [See Deal]

SU: As a general rule of thumb: lead or not lead?

JM: We tend not to lead because we don't make big bets. We can invest up to $5 million, but some of the leads in these deals are $10, $15, $20 million.

SU: You said one reason to do this was to get a feel, a leading-edge indicator...

JM: Like cancer stem cells. We knew when we started this company it was a disruptive technology that merited a lot of thought and time.

SU: Is there something about what a company is doing, or will do in five years, that makes you rethink the way you might start building facilities or leasing things?

JM: Sometimes. Chemistry is a good example. It was pretty clear pre-Lehman [the bankruptcy that triggered the global financial crisis] there was a big movement of outsourcing process chemistry. So we stopped building a lot of excess – sometimes we'd build spec labs and things like that in markets where we don't have product, and we stopped entirely building spec chemistry. It came through being on the ground in China and making investments, it was a movement we were taking note of.

The world is moving toward the intersection of engineering and biology, which you see more of. MIT is a great example. We're starting to see interdisciplinary work, dry and wet, much more flexible and movable lab space.

SU: You keep investment level per company under 10%. So no big stakes, but are there other ways to influence the outcome?

JM: We go on the board sometimes. We're pretty active. Boston Biomedical is an example. We came in on the first round, I was on the board; we made strategic decisions about going for a sale versus IPO.

SU: Do Alexandria's investors ever say, Joel, you've got millions and millions of square feet of real estate to manage. Why are you paying attention to this little company?

JM: It's limited. We only do a few where we see a huge opportunity, when we see something unusually significant or where our presence in the syndicate and on the board makes a big difference. I try not to spread too thin.

SU: Do you ever invest in biotechs because you see them from a landlord's perspective: you want them to keep the lease, to stay on board?

JM: It's pretty independent; it's a different group making leasing decisions. [Even] if we love a company, we'd never invest and trade it for rent. And we wouldn't invest purely to get somebody in our space. If that was their requirement we probably wouldn't do it because we wouldn't be sure they were quality enough. That would be an odd kind of requirement.

SU: Over the years seeing Alexandria's name among biotech investors, I always assumed rent for equity arrangements.

JM: Not a single time. We get asked sometimes, and the answer is always no. Because our multiple and stock price is measured by earnings, and if we traded paper for cash flow we'd be stupid.

SU: Any area or specific building you feel most proud of?

JM: New York, it's the flagship of the company. Tech Square in Cambridge, we doubled the income of that campus. We bought it from MIT [Massachusetts Institute of Technology] but they remain a 10% partner. 1700 Owens [in Mission Bay] was our first building here; it's an emotionally charged building. When we started, we had not a single tenant, and there were almost no other buildings around. It was scary times. It turned out fine.

SU: We all love to rub elbows in a dense urban place, but other than Alexandria being a successful company, how will we know in 20 years whether these clusters are working?

JM: The proof of the pudding is where do young highly educated and talented people want to be? They want to be in Boston or Cambridge, here in the Bay Area. (See Exhibit 2.) They don't necessarily want to be in Salt Lake or Phoenix or Amarillo or Little Rock. The proof of the pudding is where the talent is. How many people do you know want to go to New York? It's unbelievable.

Exhibit 2

Alexandria Real Estate Equities

SU: Your 10-K says Alexandria is focused on recycling sale proceeds from non-core suburban assets for investment into higher-value urban or central business district assets. When you walk around Kendall Square in Cambridge or Mission Bay in San Francisco, Alexandria's influence on the urban footprint is apparent from the outside. But what changes have happened on the inside of the buildings you've built out?

JM: There's much more office space today. That’s one change. In the labs, there’s much more biology than chemistry, as chemistry has been outsourced to Asia to a large extent. That's process chemistry, not novel inventive chemistry. Labs have also become more mobile, open, and collaborative over the past decade or so. But the big location decision has been pharma’s move from isolated silo campuses to the heart of knowledge locations, Cambridge being a prime example. Even in this building: Bayer was in Richmond [California, across the bay from San Francisco and north of Berkeley], isolated in a weird place to be. They got out of that place and came here. They didn’t have to do that, but they realized they couldn’t be as productive there. (See (Also see "Bayer Establishes Workspace For Start-Ups In An Innovative Move" - Pink Sheet, 9 Jan, 2012.).)

SU: Less chemistry, more biology: how does that play out in a building's floor plan?

JM: Ceiling heights are the same; you still build excess ceiling heights. There's the same floor loading capacity, but you have fewer fume hoods and more flexible laboratory space, much like in the old days if you were in high school doing work at the bench. The world is moving toward the intersection of engineering and biology, which you see more of. MIT is a great example. We're starting to see interdisciplinary work, dry and wet, much more flexible and movable stuff. Biology is still probably the more inventive science, I would argue.

Outsourcing has been with us for a long time, but it's pretty clear that novel inventive chemistry or biology is staying here. The Chinese are coming here. The Indians are coming here. People want to be in this country.

SU: You said you see a lot of process chemistry moving abroad. Do you see a day when other parts of the traditional lab also move abroad?

JM: Outsourcing has been with us for a long time, but it's pretty clear that novel inventive chemistry or biology is staying here. The Chinese are coming here. The Indians are coming here. People want to be in this country. We have operations on the ground in both China and India, and I've been to each maybe 40 or 50 times, and my experience is that with a few minor exceptions they're a long way behind us. For China to get an FDA that would approve novel drugs and an ecosystem that could produce novel drugs, my guess is it's at least two decades away. But a lot is going on there in process stuff, CRO work, things like that.

SU: The former Building 20 at MIT was famous for inadvertently fostering scientific creativity. Do you think about how to make people connect when you’re building?

JM: All the time. We have a building in Mission Bay, we're bringing in amazing food service, an Italian trattoria that’s going to go from an inside wood burning pizza oven, a cool environment, and it’ll flow outside with views of the bay. In Cambridge we bought Tech Square from MIT a couple years ago, about 1.2 million square feet. We brought in the former chef of the Four Seasons, now he’s running a venture-backed restaurant there.

SU: I’m sensing a theme here.

JM: Well, food is a big thing. In our New York project, almost 800,000 square feet, we’ve brought in Tom Colicchio for a signature river park restaurant. We also put in a digital conference center. When Lilly [Eli Lilly & Co.] signed the anchor lease in the first building, they specified in the lease it had to have this food service and the conference center. The head of research came down and said, “I want at least 15 to 20 beers on tap.” Sounds a little odd, but in addition to flex space, collaboration rooms, all those things that you find on the floors, people want fitness and all the amenities. It’s also about recruitment. You need these things to enhance quality of life and gain a competitive advantage.

When Eli Lilly signed the anchor lease in the first New York tower, they specified it had to have food service and the conference center. The head of research came down and said, “I want at least 15 to 20 beers on tap.”

SU: Are these lessons learned from high tech, from Silicon Valley?

JM: It’s more independent of that. We don’t do quite that kind of stuff. These are PhD scientists or technicians, they’re different than engineers. But there’s a thematic approach there. We did Google’s first campus, we were struck by what they wanted and some of those things carry through.

SU: Do you consider yourselves urban planners?

JM: I don’t know about urban planners. But I think we view ourselves as cluster developers and urban campus developers. We think urban campuses are the way of the future.

SU: Is there still an argument for building suburban campuses?

JM: Obviously not everyone can afford Cambridge or New York City or Mission Bay. There’s a tier of companies and entities that prefer not to pay those kinds of prices, and prefer to be more disconnected. We still operate on Route 128 [near Boston] because we think it’s great. But we’ve exited 495, which is the second ring road [around Boston]. In North Carolina, we have about a million square feet in Research Triangle Park, and they're undergoing a new plan to "amenitize" and bring in more retail, residential, and commercial. Historically it's beautiful, but it's isolated buildings that don't interconnect. We're involved with that effort, and we'll do a big suburban ag-bio campus there.

SU: You say you anticipate the intersection of tech engineering and life sciences. How much of that is Alexandria being a public company and needing to look ahead? Biotech is very boom and bust.

JM: We don't think the life sciences are unstable. In fact, 50% of our annual base rent is [from] investment grade tenants, which by and large, means publicly traded companies, but it also means universities like MIT, UCSF, NYU [New York University], University of Washington, UC San Diego [University of California, San Diego], and a lot of work with the NIH [National Institutes of Health].

And within biotech, remember you've got Big Biotech, you've got medium and small, and almost every one of the pharmas is a client of ours. The industry is a huge growth industry, but what remains to be seen is pricing and reimbursement in the long term. We're a niche play, but we're broader. We do ag, we do life science, we do industrial biotech, we've done some tech and probably will do more. We'll clearly do a lot in the digital health area. We view it as an intersection of all those things. We still lease to Google, so it's not like they're a bad word. We own a lot of the South Lake Union neighborhood [in Seattle], and Amazon [Amazon.com Inc.] is going from three million to nine million square feet over the next five years. I'm sure we'll do business with them. It's part of being in urban environments. Is it strategic to our core business? Maybe not so much, but it's strategic to our core real estate holdings.

SU: How do you physically start to build for digital health?

JM: I don't know the answer to that yet. The intersection of health care and IT is pretty undefined. It's going to be one of the biggest industries; the pace of venture capital is the fastest in this sector. My sense it's creative space with a lot of super power. But we'll see over time. I do know if it'll be in the core clusters. (See (Also see "A New Breed Of Accelerators Helps Drive Digital Health" - Scrip, 21 Jan, 2014.).)

SU: You've started here with Rock Health, with an incubator. Is that the model for other clusters?

JM: No. Not necessarily.

SU: Did Accelerator [Corp.], your incubator in Seattle, help you get a foothold there?

JM: No, we started in Seattle a decade before the Accelerator was done. The reason we did it at the time was we were frustrated with the lack of venture capital in Seattle. So we formed our own. We put together venture people, the [Institute for Systems Biology], things like that. I don't think [our clusters] are led by the incubators, but it's an important part of the ecosystem.

SU: A lot of pharmas have copied the incubators, or tried.

JM: That's good. Copying is flattery. I don't think they can do it as well.

SU: Do they consult with you?

JM: Sometimes. We're about to close a pretty large round [for Accelerator], the fourth round, that will fund Seattle and now New York. Three new strategics are joining us in New York. I can't tell you who they are at the moment. The New York Accelerator will have a separate management team. It'll have the investors we have now plus three new strategics.

SU: Who's running the Seattle Accelerator?

JM: Thong Le [formerly of WRF Capital]. We haven't announced who's running the New York Accelerator. It'll be a little more focused on the clinical candidates.

SU: Why has it been so hard to get biotech going in New York?

JM: Any time you don't have the commercial side existing there today, it's just hard. You have to bring them. Cost of living is high. But it's clearly a great place to recruit and the proximity for collaboration is undeniable. (See (Also see "With $100M Fund, NYC Wants A Bite Of The Biotech Apple" - Scrip, 17 Dec, 2013.).) We just opened a new tower, 400,000 square feet. Roche took a chunk of space out of Nutley, New Jersey, because it was their least productive space, and now they're paying 10 times what they were paying there. But they're in New York City. That speaks for itself.

SU: This is in the flagship site you were talking about, the East River site?

JM: Now better known as the Alexandria site.