Professional Documents
Culture Documents
KEL983
December 13, 2017
CRAIG FURFINE
On a warm Sunday afternoon in August 2015, Markus Steuer, director of real estate at Drechtal
Pharmaceuticals, strolled with his family around the grounds of Park im Grünen in the Basel
suburb of Münchenstein. While those around him admired the impressive life-sized replica of a
fully grown Brontosaurus, Steuer couldn’t help thinking about the impending decision he had to
make: where his firm should relocate in the immediate future. Drechtal was currently leasing space
in seven different buildings, but the company anticipated a dramatic increase in headcount should
its first oncology drug, Trianoline, be approved for release. The potential increased demand for
space prompted Steuer’s research into the possibility of the company investing in its own corporate
headquarters. With Drechtal’s current leases set to expire over the coming 24 months, it was an
opportune time to consider the company’s options.
Current Facilities
Founded in 1998, Drechtal had grown into a CHF 2.9 billion pharmaceutical company (Exhibit
1) headquartered in Basel, the third largest city in Switzerland and located at the junction of France,
Germany, and Switzerland. Of the city’s nearly 200,000 residents, over 30% were foreign nationals,
most of whom had come to work in its two leading industries—banking and pharmaceuticals.
Novartis and Roche, two of the top three pharmaceutical firms in the world (by 2014 sales), were
headquartered in Basel.1 The ability to access a common, skilled labor pool had attracted Drechtal
as well as many other, smaller pharmaceutical companies to the city.
For the past decade, Drechtal had experienced consistent growth and profitability due to the
1
PM Live, “Top 25 Pharma Companies by Global Sales,” http://www.pmlive.com/top_pharma_list/global_revenues.
©2017 by the Kellogg School of Management at Northwestern University. This case was prepared by Professor
Craig Furfine with research assistance from Mitch Vainshtein ’16. Cases are developed solely as the basis for class
discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or
ineffective management. To order copies or request permission to reproduce materials, call 800-545-7685 (or 617-
783-7600 outside the United States or Canada) or e-mail custserv@hbsp.harvard.edu. No part of this publication may
be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—
electronic, mechanical, photocopying, recording, or otherwise—without the permission of Kellogg Case Publishing.
This document is authorized for use only by Samarys Nunez in REE6306-2023-Spring taught by Mark Thibodeau, Florida International University from Mar 2023 to May 2023.
For the exclusive use of S. Nunez, 2023.
success of three drugs it had developed for the treatment of cardiovascular disease. With its growth
came a need for additional space for its workforce. The company had never given much strategic
thought to its real estate needs, historically leasing space on an as-needed basis. As Drechtal grew,
it simply leased additional space in nearby buildings. By 2015, Drechtal leased space in seven
buildings throughout Basel (Exhibit 2). Its office workers were located in five buildings along or
near the Aeschengraben at the edge of the city center. It was a very convenient place to work,
well served by three different tram lines and just a five-minute walk from the SBB (Swiss Federal
Railway) station, which was a public transportation hub for the city and connection to major cities
throughout Europe. A fifteen-minute walk in the other direction brought office workers to the old
center of town, with plenty of shops and restaurants. Drechtal’s scientists worked in two laboratory
buildings less than a kilometer away, in the city’s St. Alban neighborhood. While this neighborhood
was more residential in nature, it was only a ten-minute walk to any of the firm’s office locations.
Leasing space as needed had provided Drechtal with the flexibility it required as its headcount
grew. Within the past eighteen months, however, Steuer had heard a variety of complaints
from employees regarding their working conditions. One team’s members complained about
inadequate access to IT support because they were not located in the same building. Other
employees complained that their current spaces lacked amenities and were crowded. Finally, some
employees expressed concern regarding current laboratory space, which was leased in buildings
shared by other pharmaceutical companies. While no security lapses had occurred to date,
Drechtal researchers were concerned about working in close proximity to potential competing
firms, since maintaining secrecy around the company’s current drug pipeline was critically
important. While employee complaints about office space were commonplace in most companies,
Steuer was sensitive to the possibility that negative employee views regarding Drechtal’s facilities
could hamper the firm’s ability to recruit and retain top talent. This sensitivity was heightened by
Roche’s 2014 announcement that it would invest nearly CHF 3 billion in new facilities for both its
office and scientific workforce.2
Potential Growth
In addition to the difficulties associated with managing employees across seven locations,
another key impetus to reevaluate Drechtal’s use of space was its potential to experience rapid
growth of staff in the near term. While the firm had generally grown its workforce at a steady
3 to 5 percent per year, a dramatic spike in hiring loomed on the horizon. Drechtal’s research
and development team had made promising breakthroughs in oncological research, and its first
oncology drug, Trianoline, was in the final stage of review by Swissmedic.3 Historically, 75 percent
of drugs that reached the final stage of review were approved. However, Drechtal management
believed that Trianoline had an even higher chance of approval because of the positive results
found in its clinical trials, informal feedback from Swissmedic staff, and significant demand for
improved oncology medications.
Based on recent hiring and current job postings, Steuer knew with reasonable certainty
that Drechtal would have 2,105 employees in 2016 (Exhibit 3). Given the significant impact that
2
“Roche Invests for the Future in Its Basel Site,” press release, October 22, 2014, http://www.roche.com/media/store/
releases/med-cor-2014-10-22.htm.
3
Swissmedic is the Swiss equivalent to the U.S. Food and Drug Administration.
2 K e l l o g g S c h oo l of Management
This document is authorized for use only by Samarys Nunez in REE6306-2023-Spring taught by Mark Thibodeau, Florida International University from Mar 2023 to May 2023.
For the exclusive use of S. Nunez, 2023.
Trianoline’s approval would have on the company, senior management had decided to establish an
entirely new division following approval in 2017, with a required additional increase in headcount
between 25 and 35 percent. If Trianoline failed to be approved, Drechtal would likely experience
continued slow and steady growth in 2017 and beyond. Although the company had several
additional drugs in the pipeline, the most promising was another treatment for cardiovascular
disease that was at least three years away from reaching the final stage of review. Even if it did
reach that stage, it was not likely to reap the potential sales and tremendous surge in hiring that
would result from Trianoline’s approval.
Options
Steuer was deciding among three options (Exhibits 4 and 5). First, Drechtal could continue to
pursue its leasing-as-needed strategy. In preliminary talks with the company’s real estate broker,
Steuer anticipated that it would be able to resign its current leases at a rate 5 percent above its
current level. The leases would be for an additional ten years and included a 5 percent increase
in rent in Year 5 of the new leases. In exchange for new leases, its current landlords would give
Drechtal a moderate tenant improvement allowance that would improve the look and feel of the
current space. While they would not add extra office amenities like exercise facilities and cafeteria
space, the improvements would update the carpet, paint, lighting, and bathrooms. When more
space became necessary, Drechtal could lease additional space in other properties on an as-needed
basis.
Alternatively, Drechtal could try to consolidate its employees in leased space. Given the limited
amount of sufficient contiguous leasable space in Basel, Steuer determined that the best leasing
option available to Drechtal would be to relocate its employees into two office buildings and a
laboratory in the city’s St. Johann neighborhood, just a few blocks away from the main Novartis
campus. Drechtal would be the sole tenant in the two office properties, but it would still have to
share the laboratory with another firm that had 5,000 square meters of lab space leased for the next
eight years. This would improve the potential for synergies between Operations and Sales and
Marketing, as well as increase the company’s overall real estate space by over 25 percent. However,
it would continue to isolate the firm’s R&D division and would not address the concern over
secrecy. It also would locate the firm in a less-convenient neighborhood for Drechtal’s employees.
The buildings were served only by the No. 11 tram and two bus lines used by commuters coming
from nearby French villages. While employees living in the city center would not typically mind
the quick trip to St. Johann, those who already had a fifteen- to twenty-minute trip to the center of
town would face another ten to fifteen minutes of commute time to make the necessary transfer.
The St. Johann neighborhood was also a ten- to fifteen-minute walk to the old city center.
The third option involved Drechtal acquiring its own corporate headquarters. Drechtal had
never owned its real estate before, but it was not uncommon for pharmaceutical firms to own
substantial property (Exhibit 6). To study this more carefully, Steuer negotiated a six-week
development option in July with Hustad Development, which was soon to begin construction of a
100,000-square-meter complex across the Rhine River in the Clara neighborhood of Kleinbasel. The
option would allow Drechtal the exclusive right to negotiate purchase of the completed structure
and to give design specifications that would best suit its needs. The new facility would be ready for
occupancy by the beginning of 2017. No other buildings currently under construction in the area
would be large enough to accommodate all of Drechtal’s operations, including R&D. Although the
K e l l o g g S c h oo l of Management 3
This document is authorized for use only by Samarys Nunez in REE6306-2023-Spring taught by Mark Thibodeau, Florida International University from Mar 2023 to May 2023.
For the exclusive use of S. Nunez, 2023.
Clara neighborhood was well-served by a network of bus and tram lines and offered a multitude of
cafes, restaurants, and shopping, it was viewed as a somewhat lower-quality area than Drechtal’s
current location, as reflected in the neighborhood’s lower rents for both residential and commercial
real estate (Exhibit 7).
Preliminary Analysis
Before deciding on the ideal real estate strategy, Steuer had to understand better how growth
in the company’s workforce would translate into its need for space. Based on an informal survey
of local peer companies, Steuer estimated that Drechtal should ideally occupy 30 square meters per
office employee and 40 square meters per laboratory researcher. Of course, the success of the firm
would dictate growth in headcount, so Steuer also understood the need to have some flexibility in
the company’s consideration of its optimal amount of space.
Given that Drechtal’s current and potential landlords had quoted lease terms for the buildings
under consideration, the greatest uncertainty Steuer faced were the costs associated with potential
ownership of a new headquarters. To calculate the price that Drechtal would have to pay Hustad
Development would require consideration of the property’s value to the developer if it put the
entire building up for lease. Ultimately, this would be influenced by the rates of return that office
owners in Switzerland typically demanded (Exhibit 8). Steuer anticipated being able to partially
finance the acquisition of the property with a long-term mortgage. In 2015, commercial mortgages
were available to finance up to 70 percent of the acquisition price at a ten-year fixed rate of 1.2
percent, with a twenty-year amortization period. Drechtal would provide the equity for the
building purchase by redirecting funds that would otherwise be invested in its core business.
Steuer knew that housing the firm within a single building offered many benefits. It was up
to him, however, to analyze the costs and determine whether it was the right move for the firm.
Steuer was scheduled to make his recommendation to Drechtal’s board of directors at the end of
the coming week. For the rest of that beautiful Sunday afternoon, however, he hoped to enjoy the
wonderful day with his family at the park. Perhaps some miniature golf, a ride on the Karussell,
and some extra time with his children on the Kinderspielplatz would help clear his mind before
the busy week ahead.
4 K e l l o g g S c h oo l of Management
This document is authorized for use only by Samarys Nunez in REE6306-2023-Spring taught by Mark Thibodeau, Florida International University from Mar 2023 to May 2023.
For the exclusive use of S. Nunez, 2023.
Income (loss) before provision for income taxes 80,210.52 -1,001,388.70 -852,170.21
Provision for income taxes 25,565.98 0.00 0.00
K e l l o g g S c h oo l of Management 5
This document is authorized for use only by Samarys Nunez in REE6306-2023-Spring taught by Mark Thibodeau, Florida International University from Mar 2023 to May 2023.
For the exclusive use of S. Nunez, 2023.
Exhibit 1 (continued)
CONSOLIDATED BALANCE SHEET 2014 2013
Assets
Current assets:
Cash and cash equivalents 630,749.64 322,722.42
Marketable securities, available for sale 605,863.08 996,813.21
Restricted cash and cash equivalents 68,842.11 0.00
Accounts receivable, net 243,020.15 16,625.98
Inventories 149,194.61 0.00
Prepaid expenses and other current assets 19,757.70 17,382.37
6 K e l l o g g S c h oo l of Management
This document is authorized for use only by Samarys Nunez in REE6306-2023-Spring taught by Mark Thibodeau, Florida International University from Mar 2023 to May 2023.
For the exclusive use of S. Nunez, 2023.
K e l l o g g S c h oo l of Management 7
This document is authorized for use only by Samarys Nunez in REE6306-2023-Spring taught by Mark Thibodeau, Florida International University from Mar 2023 to May 2023.
For the exclusive use of S. Nunez, 2023.
Exhibit 4: Options
• Renew leases for ten-year term; base rent increase of 5 percent in first year, and an additional
5 percent increase in Year 5
• Consolidate offices into three larger buildings for lease in closer proximity to one another
(but not adjacent)
• Three buildings are class A, built in the last ten years; office buildings would be fully leased
to the company; R&D building would be mostly leased, with remaining 5,000 square
meters leased to a different biotech company
• Gross lease with graduated rent: base rent at 430 CHF per square meter per year for a ten-
year term, with a 5 percent increase in Year 5
• Sub-lease space in current buildings whose leases have not expired at 5 percent discount to
contracted rent for duration of lease
8 K e l l o g g S c h oo l of Management
This document is authorized for use only by Samarys Nunez in REE6306-2023-Spring taught by Mark Thibodeau, Florida International University from Mar 2023 to May 2023.
For the exclusive use of S. Nunez, 2023.
K e l l o g g S c h oo l of Management 9
This document is authorized for use only by Samarys Nunez in REE6306-2023-Spring taught by Mark Thibodeau, Florida International University from Mar 2023 to May 2023.
For the exclusive use of S. Nunez, 2023.
Source: Orbis.
10 K e l l o g g S c h oo l of Management
This document is authorized for use only by Samarys Nunez in REE6306-2023-Spring taught by Mark Thibodeau, Florida International University from Mar 2023 to May 2023.
Office Space, A Company’s Frontier KEL983
25th 50th 75th Prime 25th 50th 75th 25th 50th 75th
Quantile Quantile Quantile Quantile Quantile Quantile Quantile Quantile Quantile
City center 240 270 310 430 1,000 1,350 1,600 2,000 2,420 2,800
Breite/St. Alban 180 230 290 370 1,000 1,240 1,400 1,700 2,075 2,500
Gundeldingen 160 220 270 300 905 1,100 1,280 1,425 1,860 2,230
Bachletten/Gotthelf 200 230 280 300 910 1,120 1,290 1,400 1,875 2,245
Iselin 150 190 230 270 850 1,010 1,175 1,220 1,670 2,100
St. Johann 160 200 280 400 980 1,280 1,400 1,810 2,100 2,460
Kleinbasel West 170 220 250 330 950 1,140 1,350 1,500 1,960 2,345
Kleinbasel East 200 240 280 320 940 1,120 1,300 1,480 1,910 2,200
Bruderholz 180 230 250 250 1,050 1,330 1,550 2,100 2,335 2,670
11 K e l l o g g S c h oo l of Management
This document is authorized for use only by Samarys Nunez in REE6306-2023-Spring taught by Mark Thibodeau, Florida International University from Mar 2023 to May 2023.
For the exclusive use of S. Nunez, 2023.
For the exclusive use of S. Nunez, 2023.
12 K e l l o g g S c h oo l of Management
This document is authorized for use only by Samarys Nunez in REE6306-2023-Spring taught by Mark Thibodeau, Florida International University from Mar 2023 to May 2023.