The Blackstone Group L.P. (NYSE:BX) is forking over $4.84 billion in cash to acquire BioMed Realty Trust (NYSE:BMR) in a deal that turns Blackstone into a leading provider of commercial space specifically designed for the biotech and pharmaceuticals industry.
Detailing the deal
The $23.75 per-share deal price is less than 10% higher than shares were trading prior to the announcement; however, BioMed Realty Trust shares gained 20.7% between September 4 and October 7, the day before the acquisition was announced.
By acquiring BioMed Realty Trust, Blackstone gets its hands on coveted lab space in the highly sought after Cambridge, Massachusetts and San Francisco, California markets. It also gets properties in other biotech hotspots, including San Diego, California and Seattle, Washington.
Demand for lab space has been strong in those markets because well-established biopharma companies have been funneling more money into increasingly complex R&D programs that require next-generation amenities. BioMed has also enjoyed growing demand due to free-flowing venture capital fueling a tidal wave of biotech start-ups.
Overall, the combination of these trends has allowed BioMed to maintain enviable occupancy rates and command market leading rental prices, both of which made it an attractive target for Blackstone. In Q2, 91%of BioMed's 18.4 million square foot portfolio was leased.
Blackstone's purchase of BioMed comes at a time when the industry is under fire for what many believe to be exorbitant drug pricing. Payer ire hit a crescendo recently when it was revealed that a hedge fund manager launched a start-up to acquire a 60-year-old drug in order to increase its price by more than 4,000%. In the wake of this report, politicians lined up to criticize drugmakers, winning public support, and kicking-off a significant sell-off in the shares of biotechnology companies in the process.
Whether or not the recent biotech sell-off will be short-lived or long-lived isn't certain, and as a result, it's unclear whether or not faltering biopharma valuations may crimp venture capital's desire to fund biotech companies in the future. If biotech's slide causes financing to dry up, then it could put Blackstone in the precarious position of making a big bet on the industry, even as demand for lab space is about to fade.
Although that could pose a real risk to future occupancy rates, Blackstone appears confident that it can weather any fallout from payer pushback against its tenants. It's optimism may be tied -- at least in part -- to the fact that BioMed's tenants include some of the largest and best-heeled biopharma companies on the planet. As of earlier this year, 83% of BioMed's tenants were research institutions and publicly traded companies, and less than 4% of tenants were early stage life sciences companies, which are most susceptible to funding risks.
About 10,000 baby boomers are turning 65 every day in America, and healthcare reform has led to more than 20 million more Americans getting access to either Medicaid or health insurance. Additionally, technological advances are ushering in an era of personalized medicine that may reduce the risk of trial failure because drugmakers are getting more sophisticated at targeting their medicine toward specific patient populations and pre-empting clinical pitfalls.
Those trends offer tailwinds that support sales and profit growth at biopharma companies, and therefore indirectly boost demand for lab space. If so, then Blackstone's purchase of BioMed could prove savvy, regardless of the timing -- especially for those biotech companies that its other L.P.s are funding.
Todd Campbell has no position in any stocks mentioned. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may have positions in the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.