Life Sciences Outlook San Diego. 2012

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1 Life Sciences Outlook San Diego San Diego clusters driving scientific innovation Torrey Pines Pfizer sells three campus buildings, totaling 307,000 s.f. UTC/Eastgate Bristol-Myers Squibb completes $7.0 billion Amylin acquisition Sorrento Mesa Shire Pharmaceuticals completes 170,000 s.f. BTS deal Sorrento Valley Rental rates trending upward as redevelopment continues

2 San Diego San Diego ranks No. 2 among U.S. life sciences clusters, supported by its collaboration, cohesiveness and academic prowess. Global trends The aftereffects of the recession, coupled with the European sovereign debt crisis, continue to plague business operations in the mature market clusters of North America and Western Europe, including those of life sciences companies of all sizes and maturity levels. Although most life sciences companies continue to enjoy higher profit margins than those of other industry segments, it has become markedly clear that the innovation formula of the past no longer applies. As a result, greater emphasis is being placed on the next wave of drugs and treatments those stemming from biological organisms. Additionally, companies are increasingly diversifying their portfolios to mitigate risk and help fund the lofty costs of innovation, adding generic brands, crop and animal science and even consumer products through mergers and acquisitions. New product developments have become ever more costly and difficult to achieve. Drug makers are attempting to achieve greater breakthroughs with less funds than in years past. The need to increase a company s likelihood of developing a new treatment continues to steer conversations around location strategy. Although many companies maintain R&D in mature markets rich with people capital and renowned research universities, others are turning to emerging global clusters due to dedicated private and public funding. Jones Lang LaSalle San Diego 2012 Ardea Biosciences for $1.3 billion, Hologic s purchase of Gen-Probe for $3.7 billion, and Bristol- Myers Squibb s offer to purchase Amylin Pharmaceuticals for $7.0 billion. Not to be forgotten was Illumina fending off Roche s $6.7 billion takeover, which died after Roche let its offer expire in late April. But how will this swell in M&A activity affect the local real estate market? Will San Diego be left with a surplus of available space, much like what happened in the previous decade when a number of Big Pharma firms pulled out of town? It appears that AstraZeneca will keep Ardea in its San Diego facility while the company completes Phase III testing of its lead drug candidate. Amylin, who leases over 400,000 square feet in UTC, has yet to receive direction from Bristol-Myers Squibb on what will happen with its real estate. With a number of questions still pending on the Amylin and Ardea facilities, the life sciences real estate market had exceptionally slow leasing activity. Some positive news came with Shire Pharmaceuticals (who acquired Advanced Biohealing in 2011) finalized negotiations with BioMed Realty for a build-to-suit campus in Sorrento Mesa. The company s initial plan is to construct a 170,000-square-foot facility to house manufacturing, warehouse and other related uses, with the site providing planned growth of up to 800,000 square feet. Shire will continue to operate its 85,000- square-foot Torrey Pines facility in addition to the build-to-suit, and the company is currently in negotiations to expand into an adjacent Torrey Pines project to accommodate immediate growth. Additional leasing activity included Takeda expanding into 43,000 square feet of office space in Torrey Pines and ACON labs renewing in its 17,000-square-foot Sorrento Mesa facility. San Diego life sciences scorecard 1 st 4.8% 3 rd 3 rd 1.3% $ th $871.7 Within the United States, life sciences-focused clusters are at various stages in their evolution. The Northeast and California continue to dominate with their extensive university networks and deep labor pools, but, more and more, emerging clusters offer great talent coupled with more competitive real estate opportunities. San Diego market overview M&A activity continues to create a buzz in the San Diego life sciences sector. During the past 12 months, the local market has recorded a staggering $13.8 billion in M&A activity among eight deals. Blockbuster deals completed in the most recent quarter included AstraZeneca's acquisition of % life sciences employment % life sciences establishments Rank in relation to 21 United States clusters VC funding (in millions) Sources: Bureau of Labor Statistics, PricewaterhouseCoopers, National Institute of Health NIH funding (in millions)

3 Life sciences market analysis Jones Lang LaSalle San Diego 2012 Trailing M&A activity Submarket availability Date Transaction Parties Price June 2011 Advanced Biohealing sale to Shire $750M July 2011 Amira sale to Bristol-Myers Squibb $325M October 2011 Anadys sale to Roche $230M November 2011 ebioscience sale to Affymetrix $330M 35% 30% 25% 20% 15% 16.5% Sublease availability Direct availability 5.6% December 2011 Intellikine sale to Takeda $190M April 2012 Gen-Probe sale to Hologic $3.7B April 2012 Ardea sale to AstraZeneca $1.3B 10% 5% 0% 1.5% 7.0% 9.9% 2.8% 5.8% 20.5% August 2012 Amylin sale to Bristol-Myers Squibb $7.0B Submarket Outlook Time on market analysis: spec. vs. 2 nd gen. suites Average # months on market Spec. suite 2nd gen Submarket summary / market outlook The second quarter s availability rate for San Diego s life sciences market (Torrey Pines, UTC, Sorrento Mesa, Sorrento Valley) was 13.4 percent, rising 70 basis points from the first quarter. The increase in total availability was primarily due to a sharp rise in sublease space. Back in May, Sapphire Energy listed its 79,000-square-foot building for sublease and Amylin formally listed 71,500 square feet of specialty lab space to the market. Direct availability on the other hand recorded a small drop during the quarter, spurred on by some leasing activity in Torrey Pines and UTC / Eastgate. Rental rates continued to rise across all submarkets. Sorrento Valley, which has historically been the low rent submarket, is seeing rental rates in the $2.25-$2.50 per square foot per month NNN range. Landlords continue to modernize antiquated space and have realized a sharp increase in rates as well as transaction volume when compared to second generation space that is left untouched, as highlighted in the graph to the left.

4 Jones Lang LaSalle San Diego 2012 Torrey Pines Overview Torrey Pines is home to San Diego s largest concentration of lab space with over 5.0 million square feet. The submarket is adjacent to the UC San Diego campus and acts as the epicenter of San Diego s life sciences market. It boasts occupancy by a number of acclaimed research institutes, some of the world s largest pharmaceutical companies and a number of successful biotech companies that range from start-ups to mature corporations. Torrey Pines has experienced relatively light leasing activity among its lab product. The first half of 2012 only recorded 75,684 square feet of transaction activity, down from the 2011 first half total of 169,000 square feet. On the other hand, the submarket s small supply of available space has been very active during the second quarter, highlighted by Takeda Pharmaceuticals expanding into 43,200 square feet of additional space as it relocated its San Francisco workforce to San Diego. Outlook After a relatively quiet first half of 2012, activity in Torrey Pines is anticipated to increase during the second half of the year, both on a positive and discouraging front. The month of July has already seen Vertex Pharmaceuticals complete a six and a half year renewal in its 81,000-square-foot facility. Additionally, Shire Pharmaceuticals and Sequenom have requirements to fulfill immediate expansion needs. Perhaps the most significant news is Pfizer s recent sale of three campus buildings, which together total 307,000 square feet. The sale closed during the third week of August and will bring a flood of new supply to the submarket and cause the total availability rate to surge by some 480 basis points to13.3 percent. Key market indicators Inventory 5,339,591 s.f. Total availability 8.5% Direct availability 7.0% LEASING ACTIVITY Takeda Pharmaceuticals 43,159 s.f. (100% office) Shire Pharmaceuticals 40,864 s.f. (100% office) Zenobia Therapeutics 1,340 s.f. PFIZER CAMPUS Legacy Partners was the buyer of CB5, CB6 and CB7, totaling 307,000 s.f. All three buildings were sold vacant. The space had been on the market for 12 months and closed on August BTS DEVELOPMENTS Spectrum 160,000 s.f. Sunrise 155,000 s.f Science Center Drive 65,756 s.f Science Center Drive 39,335 s.f. 5 BIOTECH REQUIREMENTS Sequenom is in the market for 25,000 s.f., Wellspring Biosciences is out with a 12,000 s.f. requirement, Anaphore and Dermtech are both out for 7,000 s.f. and BioEdge for 3,500 s.f. This quarter s biggest news: Pfizer s sale of three campus buildings, that together total 307,000 square feet. Sublease availability 1.5% Asking rents $2.95-$3.75 NNN/s.f./mo. Activity key: Leasing Development Sales Tenants in the market Large blocks of space Change quarter-over-quarter

5 Jones Lang LaSalle San Diego 2012 UTC / Eastgate Overview The UTC / Eastgate submarket, like Torrey Pines, is comprised of mature, publicly traded companies with advanced product development. This submarket, which offers the most direct competition to Torrey Pines, has 2.3 million square feet of lab space and is located in San Diego s Golden Triangle, which offers numerous amenities to tenants. Eli Lilly, Illumina, Bristol-Myers Squibb (Amylin Pharmaceuticals) and Celgene are the submarket s largest users, together leasing 1.4 million square feet of space or 61 percent of the submarket s total life sciences inventory. Transaction activity in the UTC / Eastgate market has been slow, with only four transactions completed year-to-date, totaling 43,000 square feet. This trend is consistent with the previous four years as the submarket has suffered from weak transaction volume. Where it has stood out is its robust activity among large users, seeing some of San Diego s largest lease transactions, most recently Celgene who signed a 172,000-square-foot, 10-year transaction late last year. Outlook UTC currently has 330,000 square feet of space under construction with another 784,000 square feet of potential build-to-suit and redevelopment opportunities, with both BioMed Realty and Alexandria working on future plans. Bristol-Myers Squibb finalized its purchase of Amylin Pharmaceuticals in August and has yet to announce plans for the 406,000 square feet that Amylin currently utilizes. Additionally, Illumina continues to market its 193,000-square-foot campus for sublease. Look for UTC / Eastgate to continue modest amounts of leasing activity through the balance of 2012, with no large transaction on the horizon. Key market indicators Inventory 2,273,936 s.f. Total availability 26.5% LEASING ACTIVITY Samumed 12,125 s.f. ESPLANDE A 67,050 s.f. building redevelopment project. 2 BTS DEVELOPMENTS Innovation Center 275,000 s.f. Cushman Land 190,000 s.f. SOLSTICE The biotech firm is in the market for 5,000 s.f. UTC currently has 330,000 square feet of space under construction with another 784,000 square feet of potential build-to-suit and redevelopment opportunities. Direct availability 9.9% Sublease availability 16.6% Asking rents $2.65-$3.75 NNN/s.f./mo. Activity key: Leasing Development Sales Tenants in the market Large blocks of space Change quarter-over-quarter

6 Jones Lang LaSalle San Diego 2012 Sorrento Mesa Overview Sorrento Mesa is comprised of 4.0 million square feet of lab space and caters to all tiers of San Diego life sciences companies. Some of the largest companies there include BP Biofuels, AstraZeneca (Ardea), Hologic (Gen-Probe), Vical, Arena Pharmaceuticals, Nuvasive and Genomatica. Over the years, Sorrento Mesa was formed as developers saw opportunities for greater returns through the conversion of industrial and flex buildings into R&D wet lab facilities. Sorrento Mesa recorded 253,000 square feet of leasing activity during the first half of 2012, more than any other submarket; this was highlighted when Shire Pharmaceuticals selected the vacant land site on Camino Santa Fe (adjacent to the existing Alere campus) for its regenerative medicine campus. Shire s initial plan is to construct a 170,000-square-foot facility to house manufacturing, warehouse, and other uses, with the site able to provide growth of up to 800,000 square feet. Outlook Sorrento Mesa boasts a number of emerging companies that continue to expand within the submarket. Organovo, a breakthrough regenerative medicine company, has continued to grow over the past five years and recently moved into a 15,000-square-foot, state-of-the art facility on Nancy Ridge Drive. Genomatica, voted number one in Biofuels Digest 30 Hottest Companies, continues to gain momentum and market share. The company recently raised a $41.5 million, Series D round of financing and is in negotiations to expand its 29,000 square foot premises within the Wateridge Summit campus. Since inception, the company has secured a total of $125.0 million in financing. Key market indicators Inventory 4,009,844 s.f. Total availability 8.6% Direct availability 5.8% LEASING ACTIVITY Shire Pharmaceuticals 170,600 s.f. (build-to-suit) ACON Labs 16,784 s.f. SG Biofuels 11,417 s.f. WESTRIDGE A 45,000 s.f., two building flex / lab campus on Nancy Ridge Drive sold for $4.4 million ($96 p.s.f.). PACIFIC CORPORATE CENTER A 83,000 s.f. build-to-suit. 4 BIOTECH REQUIREMENTS Intrexon is out for 35,000 s.f., Tear Lab has a 14,000 s.f. requirement, Valor Medical is out for 10,000 s.f. and SKS Ocular 4,000 s.f. Shire s plan is to construct a 170,000-squarefoot facility to house manufacturing, warehouse and other related uses, with the site providing planned growth of up to 800,000 square feet. Sublease availability 2.8% Asking rents $2.25-$2.85 NNN/s.f./mo. Activity key: Leasing Development Sales Tenants in the market Large blocks of space Change quarter-over-quarter

7 Jones Lang LaSalle San Diego 2012 Sorrento Valley Overview Sorrento Valley was developed as an ancillary market to Torrey Pines and today continues to be home to many of San Diego s start-up life sciences companies. With a base of older industrial and flex buildings that have been converted to lab space, this submarket provides an economical alternative for early stage companies. Some of the submarket s prominent companies include Halozyme Therapeutics, Tandem Diabetes and Althea Technologies. First half leasing activity within the Sorrento Valley submarket produced four lease transactions totaling 77,000 square feet of total leasing activity, with no deals completed during the second quarter. Despite the limited activity, however, the submarket has recorded a steady increase in rental rates, trending toward the mid-$2.00 per square foot per month NNN range. Although some of this increase is due to the overall health of the life sciences market, the repositioning of antiquated space is also strengthening rents. Outlook BioMed Realty, which led the submarket s redevelopment trend at its newly renovated Coast9 campus, has seen considerable leasing activity. The newly renovated campus has already signed four new companies totaling 38,000 square feet, with another two companies currently in negotiations. Further repositioning of Sorrento Valley s older product is anticipated by Parallel Capital Partners who recently purchased 310,000 square feet of lab, office and R&D buildings from Collins Development. Leasing activity among smaller tenants is expected to remain strong during the second half of 2012, which will further reduce lab space availability under 10,000 square feet. Key market indicators Inventory 1,260,661 s.f. Total availability 26.1% Direct availability 20.5% Sublease availability 5.6% LEASING ACTIVITY Althea Technologies 2,633 s.f. (100 percent office) COLLINS PORTFOLIO Collins Development, a long time owner of lab, flex and office space in Sorrento Valley, is under contract to sell its 310,000 s.f. portfolio to Parallel Capital Partners. The purchase price is estimated at $130 p.s.f. 2 REDEVELOPMENT PROJECTS Coast9163,000 s.f Sorrento Valley Boulevard 55,000 s.f. 4 BIOTECH REQUIREMENTS Inovio Pharmaceuticals has a 20,000 s.f. requirement, Pathway Genomics 12,000 s.f., NexBio is out for 15,000 s.f. and Cosmo Biosciences 5,000 s.f. Sorrento Valley has recorded a steady increase in rental rates, trending toward the mid-$2.00 per square foot per month NNN range. Asking rents $1.95-$2.50 NNN/s.f./mo. Activity key: Leasing Development Sales Tenants in the market Large blocks of space Change quarter-over-quarter

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