|
I wrote up Alexandria Real Estate Equities (ARE) a while back, and at first glance it looked like a solid high yield REIT with a dividend easily covered by profits.
But we didn’t buy it, and a few weeks ago, they cut the dividend by 45%.
Let’s show you what happened and what we can learn.
 |
Alexandria’s Business
Alexandria is the premier landlord for the life science industry.
They own massive “Mega Campuses” in innovation hubs like Boston, San Francisco, and San Diego.
 |
Their tenants are pharmaceutical giants, companies like Eli Lilly, Bristol Myers Squibb, and Moderna.
They also rent space to earlier stage life science companies and the research departments of large universities.
Even Google’s life science division Verily rents space from Alexandria.
For a long time, this was a steady, growing business.
But real estate relies on the health of its tenants.
Why the cut?
The issue isn’t Alexandria itself.
The issue is that Alexandria has put all of its eggs in the life science basket.
And life science and biotech companies are facing a perfect storm of issues right now.
At their investor day, Alexandria’s management said that all 4 pillars of the industry are collapsing at once.
 |
Basic science is being challenged: The NIH is making it much harder for universities and other scientists to get funding for the basic science that Alexandria’s customers build from
Venture capital is drying up: Many biotech start ups rely on venture funding to get started, which is drying up
FDA turmoil: There’s lots of staff turnover at the FDA and approvals are being delayed
Pricing pressure: The U.S. government is pressuring pharma companies to lower drug prices, reducing profits
These headwinds against the life science industry, and their landlords, are structural and severe.
So, the board decided to cut the dividend to preserve their balance sheet.
Let’s go through each of these issues briefly and show you how the affect Alexandria’s tenants.
Basic Science Funding
The National Institute of Health is an important source of funding for biotech and life science companies.
A study published in JAMA Health Forum showed that the NIH spent $187 billion for basic or applied research related to 354 of the 356 drugs approved by the FDA from 2010-2019.
That means that NIH dollars helped fund essentially every new drug of the last decade.
The study found that the NIH spent about as much money as the the biopharmaceutical industry for each new approved drug.
 |
NIH funding is very important, but it’s under a lot of pressure right now.
The Trump administration wants to dramatically cut the NIH budget by 40% and consolidate the agency from 27 institutes into 8.
So far, Congress has rejected this idea.
But even if the budget doesn’t get cut, the administration seems intent on slowing things down and making funding difficult.