Negotiating attractive incentive packages to support growth initiatives
As the life sciences industry continues to grow and create high-quality, high-paying jobs across the United States, state and local units of government are implementing economic development policies and offering incentive packages to make investments in their jurisdictions more attractive. Many of these incentives packages are meaningful to investment decisions in the life sciences industry, as organizations face the rising cost of real estate, tight labor markets and higher levels of research and development spending.
Rising costs of real estate
Top markets for the life sciences industry struggle with infrastructure and affordability challenges. Vacancy rates in top regions have been trending at less than 2 percent, and extremely high rents indicate a shortage of suitable space for life sciences organizations. This also makes it increasingly difficult for these regions to recruit and retain talent and keep recent graduates in the area.
Competitive labor market
The competition for hiring top talent in the life sciences industry has driven up the cost of labor dramatically. As of 2018, wages in the life sciences sector were more than 70 percent higher than the national average of all other occupations, according to the U.S. Bureau of Labor Statistics.
Research and development expenses
According to Jones Lang LaSalle’s (JLL’s) Life Sciences Outlook 2019 report, biopharma firms spent a record-breaking $179 billion on R&D in 2018, with investment expected to grow to $213 billion by 2024. Despite the growth in R&D investment, returns for biopharma R&D have dropped to their lowest level in years due to the increasingly high price of bringing new drug therapies to market.
Many life sciences organizations are addressing these growth challenges by taking advantage of government incentive programs. While incentives packages vary by location, the programs generally encourage business growth and development by providing financial assistance tied to performance metrics (usually capital investment and job growth), with a focus on targeted industries and designated under-utilized areas. Consider some of the activities that trigger government incentive opportunities:
- Job creation and/or retention
- Construction of a new facility
- Remodeling an existing facility or moving/adding facilities
- Facility lease – renew or lease new space
- Job training
- Acquisition of a business
- Transferring equipment and/or employees from another facility
- Rehabilitation of old/historical structures
- Research and development expenses
The efforts of the governmental entities to attract life sciences companies has proven to be critical to their economic development efforts. Many states have made capital investment and job creation in this industry a priority by creating and implementing incentive programs specific to the industry. These programs, including those noted below, help mitigate some of these challenges.
- Many states have mimicked federal policy and implemented R&D tax credit programs to reduce the burden of high research costs.
- A number of states have also implemented training programs for life sciences organizations to address the challenges associated with a tight labor market.
- Many state and local governments have created tax increment financing, tax abatement, grant and tax credit programs offered exclusively to life sciences companies.
Case study
Company: An international contract research organization with multiple domestic laboratory locations
Business challenge: The Company needed to expand its domestic laboratory operations and considered three different states for the investment. The planned investment totaled roughly $40 million in capital expenditures and once operational, would support more than 200 new jobs.
Approach: Baker Tilly’s incentives advisory team evaluated the capital expenditures and labor investment to develop a summary of economic and tax impacts that the investment would create within each location. With an understanding of the incentives programs available and past incentive packages offered in each location, Baker Tilly led negotiations with the associated government entities.
Results: The Company ultimately chose to split their investment between two locations and received a combined offer of incentives in the two chosen locations that exceeded $3.5 million. The third state had a more lucrative incentives package, but was not selected due to real estate and labor costs.
For more information on this topic, or to learn how Baker Tilly can help, contact our team.
